When you get a loan, you must repay it to the lender within a certain period of time. The repayment includes both principal and interest from a predefined number of monthly payments.
Simply put, repaying the loan through a series of scheduled payments, commonly known as EMI, that includes both the principal amount outstanding and the interest component, is known as a repayment program. Also called the amortization table.
What is a payback plan?
The loan repayment schedule is described in the loan repayment schedule shared by the lender with the borrower. This table is usually determined by a loan repayment calculator. The borrower can check how much of the monthly EMI is used to repay the principal or interest, depending on the interest rate and the term of the loan.
Typically, you will notice the following information on your payment schedule:
- Loan Information– With the Loan Repayment Calculator, you can enter information such as the total loan amount, the loan term, and the interest rate. The depreciation calculations are based on these factors.
- Payment Frequency – The first column of your payment schedule shows how often you must make payments to your lender. In general, the most common format is a monthly payment cycle.
- Total Payment – This column calculates the total monthly amount of EMI that the borrower must pay. You can also use a personal loan calculator to find this number.
- Additional payment – If the borrower has access to more funds and decides to overpay the loan account more than the assigned EMI value, the loan repayment calculator will automatically apply the additional amount paid on the main loan. All future interest payments on the loan will be recalculated and the updated balance will be listed in this section of the amortization schedule. Please note that this does not apply to personal loans.
- Principal Repayment – The amount for the monthly repayment of the loan amount is displayed in the Principal Repayment column of the repayment schedule. Typically, you will find that the number increases over the life of the loan.
- Interest Charge – The monthly interest payment is recorded in this column of the payment schedule. You will find that monthly interest payment decrease over the life of an amortized loan.
- Outstanding Balance – This column calculates your outstanding credit balance after a scheduled payment. This can be done by subtracting the principal component paid during each period from the current outstanding credit limit.
Why is the loan payment schedule important?
The payment schedule is an important document for the borrower because:
- It helps borrowers understand their loan repayment by dividing the balance into equal monthly repayments or EMI.
- The borrower can keep track of the money that is paid for interest or principal.
- It also updates the outstanding balance of the loan item that makes each monthly payment.
- The repayment schedule also helps borrowers calculate the total interest payable on the loan if an additional payment has been made to the loan account in excess of the EMI amount.
- This is particularly useful with mortgages, which often accept partial payments.
- Finally, the amortization schedule helps calculate the total interest paid annually, which is useful for obtaining tax breaks on certain credit products, such as home loans.