How Does Amortization Schedule Work?

17 May, 2014

Before we get to understand more about the way amortization schedule works, it would be a better idea if we had some basic information as what exactly amortization schedule is. In simple words, an amortization schedule is a table each and every payment that you make, against a loan that you have taken. The table shows the interest component that gets added to your principal and also gives you the latest picture of principle outstanding after factoring the repayments that you have made over a period of time. Though it might look a bit complicated in the beginning, if you understand the way it works, you will find out how simple it is.

Find Out The Number of Payments

The first job of understanding how amortization schedule works is to find out the number of payments or instalments for a loan taken. Once this is clear, the next job of finding out the interest payable and the principal repayment also becomes easy. The payment could be for a few months, usually 36 to 48 months for a personal loan to around 240 to 360 for a home mortgage loan.

Get A Fix On The Monthly Payment

Now that you have an idea about the number of payments, the next job is to find out how much you are ready to pay each month for the total number of months, as mentioned above. The monthly payment will have a bearing on the interest amount repaid and also the principal amount repayments.

Determining the Interest Component

Once you are able to enter the total number of payments and the amount of payments each month, you will be able to get a grand total of all payments. Now the job is to bifurcate the total payments into principal and interest. This can be done by calculating the monthly interests (divide total interest percentage by 12 months) and plot the amount also on the excel sheet. When this is done from the entire period or tenor of the loan, you will be able to get the total interest payable.

Understand How To Use Online Calculators

Today, there are hundreds of websites which help in calculating the EMI payable, the interest percentage and the tenor online. All that you need to do is to key in the respective figures in the space provided by the websites. Once you enter the right details, you will be able to generate an amortization chart within a few minutes.

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