When you get into the finance world, you start hearing the term “amortization schedule” everywhere. If you’ve ever wondered what it meant, we have the answer in this article.
An amortization schedule is a table that shows how the payment of a loan will go. In a detailed way, the amortization schedule shows the amount of principal and the amount of interest of each payment until the loan’s term is up.
This is an excellent tool for loan recipients to understand how the loan payments break down and have a clear picture of how it will go in the future.
How does an amortization schedule work?
As the amortization schedule is a table, it shows every single payment an investor makes from the beginning to the end of a loan. Every payment is recorded systematically. It allows the investor to see what the required payments are in advance. A portion of that payment is for interests and the rest goes to pay down the loan balance.
Interests are charged on your loan every month, so the amortization schedule shows you where to multiply the loan balance by the monthly interest rate. This is particularly important for long term loans. It is generally better to get loans that require interest payments in the early years, as opposed to the ones that offer free interest charge for 24 months and then charge interests as the maturity term approaches.
There are different ways in which you can pay your loan, and it will depend on the agreement you sign with the lender. In most cases, interest rates tend to be lower towards the end, because they are based on the remaining amount of the loan, not on the total. If you look at your full amortization schedule, you will see monthly balance tends to decrease over time.
Every amortization schedule will show you, of the total payment, how much goes towards cancelling interests and how much is for the loan balance. To know the total interest amount charges over the first year, you can check the column called “cumulative interest”, which is where the table records all the interest you pay over time.