An amortization schedule is a table that provides the details of the periodic payments for an amortizing loan. The principal of an amortizing loan is paid down over the life of the loan. Typically, an equal amount of payment is made every period.

An amortization schedule can be generated by an amortization calculator, with the inputs of the amount, periodic terms, and interest rate of the loan. Through amortization schedules, borrowers can better plan and track how much they still owe and how they will be repaid.

Summary

An amortization schedule is a table that provides the periodic payment information for an amortizing loan.

The loan amount, interest rate, term to maturity, payment periods, and amortization method determine what an amortization schedule looks like.

Amortization methods include the straight line, declining balance, annuity, bullet, balloon, and negative amortization.

Understanding Amortization Schedules

Periodic payments are made for amortizing loans, such as a car or home mortgage. Each payment consists of two components – interest charge and principal repayment. The percentage of interest or principal repayment varies for different loans.

The amount of interest charged for each period depends on the predetermined interest rate and the outstanding balance of the loan. The remaining portion of the periodic payment is applied to repay the principal. Only the portion of the principal repayment reduces the remaining loan balance.

With a specified loan amount, the number of payment periods, and the interest rate, an amortization schedule identifies the total amount of the periodic payment, the portions of interest, the principal repayment, and the remaining balance of the loan for every period.

Typically, the remaining balance of an amortizing loan diminishes as time passes, with principals repaid. Thus, the interest amount for each period also decreases over time, and the principal repayment increases gradually.

Example of Amortization Schedule

Consider a $30,000 fully amortizing loan with a term of five years and a fixed interest rate of 6%. Payments are made on a monthly basis. The following table shows the amortization schedule for the first and last six months.

The loan is fully amortized with a fixed total payment of $579.98 every month. The interest payment for each month can be calculated by multiplying the periodic interest rate with the ending balance from the last month. The remaining portion of the total monthly payment is thus the principal repayment.

In the first month, $150 of the total payment is the interest, and $429.98 is the repayment for the principal, which reduces the balance of the loan. As time passes, the interest portion decreases, and greater values of principal are repaid gradually. The balance of the loan, therefore, diminishes at an increasing speed.

Methods for Amortization Schedule

There are multiple methods to amortize a loan. Different methods lead to different amortization schedules.

1. Straight line

The straight-line amortization, also known as linear amortization, is where the total interest amount is distributed equally over the life of a loan. It is a commonly used method in accounting due to its simplicity. With fixed periodic total payment and interest amount, the principal repayment is also constant over the life of the loan.

2. Declining balance

The declining-balance method is an accelerated method of amortization where the periodic interest payment declines, but the principal repayment increases with the age of the loan. In such a method, each periodic payment is greater than the interest charged (interest rate times the beginning loan balance of the period); the remaining part repays the principal, and the loan balance declines. The declining loan balance leads to lower interest charges, and thus accelerates the repayment of the principal.

3. Annuity

A loan amortized in the annuity method comprises a series of payments made between equal time intervals. The payments are also typically made in equal amounts. There are two types of annuity: ordinary annuity, for which payments are made at the end of each period, and annuity due, for which payments are made at the beginning of each period.

Different types of annuities can cause a slight difference between their amortization schedules. The higher the interest rate or the longer the loan life, the greater the difference. The amortization schedule example above uses the ordinary annuity method.

4. Bullet

Bullet loans are not typically amortized over the life of loans. Generally, the periodic payments of a bullet loan cover the interest charges only. It leaves a large amount of the final payment at the maturity of the loan, which repays the entire principal.

Therefore, the balance outstanding of a bullet loan remains unchanged over the life of the loan and is lowered immediately to zero at maturity.

5. Balloon

A balloon loan is similar to a bullet loan, which usually repays its entire principal at maturity. Occasionally, it is amortized with small amounts of principal repayments, but still leaves the majority paid at maturity. In such a case, the balance outstanding slightly decreases over the loan life and falls to zero at maturity.

6. Negative amortization

In the negative amortization method, the total payment of a period is lower than the interest charged for that period. It means that there is nothing left from the periodic payment to repay the principal, and the remaining interest charge will accumulate to increase the outstanding balance of the loan. The loan balance increases over time and will be repaid at maturity.

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