A table that provides details of the periodic payments for a reducing loan
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What is an Amortization Schedule?
An amortization schedule is a table that provides both loan and payment details for a reducing term loan.
Details typically include the original loan amount, the loan balance at each payment, the interest rate, the amortization period, the total payment amount, and the proportion of each payment that is made up of interest vs. principal. Amortization schedules can be easily generated using several basic Microsoft Excel functions.
In general, amortization schedules are provided to borrowers by banks or other financial institutions when credit is extended so that borrowers understand the repayment structure.
Key Highlights
- An amortization schedule is presented as a table that outlines key loan characteristics like payment amount, interest vs. principal, and the current balance.
- An “amortizing loan” is another way of saying a “reducing loan” (for which the balance outstanding reduces at each payment).
- A non-amortizing loan where the full balance outstanding is due at the end of the loan term is often called a “bullet repayment.”
- Reducing term loans are usually structured as either equal payment (blended) or as equal amortizing (principal + interest).
Understanding Loan Amortization
A good deal of both consumer credit (like car loans and home mortgages) and business credit (like CAPEX loans for PP&E and commercial mortgages) is repaid by periodic payments, sometimes called installments. These are often monthly, but not always.
When a loan is repaid in installments, it’s typically referred to as an amortizing loan (or a reducing loan). Below is an example of a $100,000 loan on a 12-month (1-year) amortization.
The point of a reducing loan is that the outstanding balance is paid down to zero at the end of the amortization period:
Components of a Loan Payment
Every loan payment has two components, interest and principal.
With a reducing loan, some portion of the original loan amount is repaid at each installment. Only this principal portion of the loan payment reduces the total loan amount outstanding; the interest portion does not.
The proportion of interest vs. principal depends largely on the interest rate and on whether the loan is structured as an equal amortizing loan or as an equal payment loan (often called blended payments).
Equal Payment vs. Equal Amortizing
Amortization schedules should clearly show if a loan is equal payment or equal amortizing.
Equal Payment Loans
This is often referred to as a blended payment structure. The borrower knows exactly how much their loan payment is, and the payment amount will be equal each period. A common example is a residential mortgage, which is often structured this way.
Here’s an easy way to visualize loan payments on a 2-year (24-month) amortization schedule:
Since interest is calculated on the principal amount outstanding at the end of the previous period, the proportion of interest embedded in the loan payment (orange) is higher earlier on, then lower later.
The secondary vertical axis shows the total loan balance, represented graphically by the gray line. You’ll notice that the outstanding loan balance decreases with each installment of principal (blue bars).
Equal Amortizing Loans
This is often referred to as a P&I structure (principal + interest). In an equal amortizing structure, the loan amount is divided by the total number of payments; this becomes the principal payment amount each period, with interest being charged over and above the principal amount.
Here is the same loan as before ($100,000 over 24 months) but using an equal amortizing structure instead of an equal payment structure:
Here the blue “principal” bar remains the same over the loan amortization period, with the orange interest being added incrementally.
Related Resources
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers in banking to the next level. To keep learning and advancing your career, the following resources will be helpful:
FAQs
An amortization schedule or table gives you a visual countdown to the end of your mortgage. It's a chart that shows you how much of each payment will go toward interest and principal—until you pay off the house!
How do you beat an amortization schedule? ›
3 Loan-Amortization Tips
- Add Extra Dollars to Your Monthly Payment. If your total mortgage loan is $100,000 and your fixed monthly payment is $500, add $100 or more to each monthly mortgage payment to pay down the loan more quickly. ...
- Make a Lump-Sum Payment. ...
- Make Bi-weekly Payments.
All online amortization calculators are estimates. They might use different interest calculation methods, and they divide a year evenly by 12 months. In reality interest is charged monthly but accrues daily, and each month has a different number of days so it fluctuates.
What three things you would find on an amortization schedule? ›
Beginning balance: This is the principal balance you have at the beginning of each new month before you make a loan payment. Scheduled payment: This is your monthly loan payment. This number will be the same every month. Principal: This is the amount paid toward your principal with every payment.
Can I make my own amortization schedule? ›
You can build your own amortization schedule and include an extra payment each year to see how much that will affect the amount of time it takes to pay off the loan and lower the interest charges.
What is a normal amortization schedule? ›
An amortization schedule, often called an amortization table, spells out exactly what you'll be paying each month for your mortgage. The table will show your monthly payment, how much of it will go toward your loan's principal balance, and how much will be used on interest.
How do I fill out a loan amortization schedule? ›
The first column will be “Payment Amount.” The second column is “Interest Rate,” and it's optional if you're using a pen and paper. The third column is “Remaining Loan Balance.” The fourth column is “Interest Paid.” “Principal Paid” is the fifth column, and “Month/Payment Period” is the sixth and last column.
How do you solve for amortization? ›
Starting in month one, take the total amount of the loan and multiply it by the interest rate on the loan. Then for a loan with monthly repayments, divide the result by 12 to get your monthly interest. Subtract the interest from the total monthly payment, and the remaining amount is what goes toward principal.
Is amortization good or bad? ›
Longer Amortization Periods Reduce Monthly Payments
Loans with longer amortization periods require smaller monthly payments because you have more time to pay back the loan. This is a good strategy if you want payments that are more manageable.
What are the disadvantages of amortization schedule? ›
Disadvantages of Amortization
For borrowers, the biggest disadvantage is that amortization can make it difficult to pay off a loan early. Amortized loans are carefully calculated to balance the amounts paid towards the loan's interest and principal over a long term — meaning most amortized loans carry long loan terms.
How to calculate loan amortization. You'll need to divide your annual interest rate by 12. For example, if your annual interest rate is 3%, then your monthly interest rate will be 0.25% (0.03 annual interest rate ÷ 12 months). You'll also multiply the number of years in your loan term by 12.
What is the most common amortization method? ›
Broadly speaking, loan amortization only considers the principal and doesn't include interest. These are the most common ways to calculate loan amortization: The French method. Also known as the progressive (quota) method, it consists of paying back the same amount each month until the debt is fully settled.
How to pay off a mortgage faster? ›
Here are some ways you can pay off your mortgage faster:
- Refinance your mortgage. ...
- Make extra mortgage payments. ...
- Make one extra mortgage payment each year. ...
- Round up your mortgage payments. ...
- Try the dollar-a-month plan. ...
- Use unexpected income.
Making additional principal payments will shorten the length of your mortgage term and allow you to build equity faster. Because your balance is being paid down faster, you'll have fewer total payments to make, in-turn leading to more savings.
What is the formula for the monthly payment? ›
Monthly Payment = (P × r) ∕ n
Again, “P” represents your principal amount, and “r” is your APR. However, “n” in this equation is the number of payments you'll make over a year. Now for an example. Let's say you get an interest-only personal loan for $10,000 with an APR of 3.5% and a 60-month repayment term.
What is Amortisation schedule mean? ›
An amortization schedule is known as a comprehensive table of periodic loan payments, showing the amount of principal and interest that include each payment until the loan is paid off at the end of its term. Every periodic payment is the same amount in total for each period.
What is an amortization schedule Quizlet? ›
Amortization Schedule. Also called a Repayment Schedule or a Loan Reduction Schedule it shows the amount of payments for interest, the amount for principal, and the principal balance for each month over the entire life of the loan.
How to explain amortization? ›
What is amortization of a loan? Loans can include consumer credit, a bank loan and a mortgage. Amortization in this case is the gradual reduction of the debt through the repayments we agree with the lender. Broadly speaking, loan amortization only considers the principal and doesn't include interest.
What is loan amortization with an example? ›
In lending, Amortization refers to spreading out the repayment of a loan over time. A fixed chunk of your fixed equated monthly instalment (EMI) pays off the monthly interest in an amortized loan's initial repayment stage, and the remaining pay off your principal amount.
