A loan Amortization Schedule is important to mainly two people ie. Lender and a borrower and I’m going to tell you why later on in this write up. Most of the loans we go for from banks or other financial institutions are basically amortised loans and hence obviously comes with a loan amortization schedule.
However, what most borrowers look out for after their loan application has been approved is to look at the due dates and how much they will be paying each month. All other information on the loan amortization schedule is ignored by them.
But the truth of the matter is that, an amortization schedule contains more information than just due dates and installment amounts. So having said that, let us now try to make sense of what a loan Amortization Schedule is.
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What Is A Loan Amortization Schedule?
A loan amortization schedule is basically a table prepared by lenders and a copy often given to a borrower that details installment amounts and due dates, whiles also indicating how much of the payment goes into servicing of the principal and that of the interest till payment is complete.
The interesting part about the schedule is that, the installment amount remains the same throughout the loan duration. However, the amount that goes into the servicing of principal and interest varies. At the beginning of the schedule, a greater portion of the payment goes into the servicing of interest than the principal. Then as time goes on, the interest reduces whiles the principal increases till the loan s fully paid.
The schedule enables the borrower to keep track or know when the due dates are in order to make prompt payments to avoid penalties. Therefore, the schedule is also able to give the borrower an idea of what the payment plan is in order to determine if he or she can make monthly payments or not without seriously affecting their finances.
Banks or lenders usually use an amortization calculator to prepare the schedule although you can also do same online. Once you have access to any of the amortization calculators, you enter your loan amount, loan duration and then the interest rate and click calculate. The system then generates the amortization schedule for you detailing how much you will be required to pay each month, total interests and how much you will be paying in total.
READ ALSO: How An Amortized Loan Works
An amortization schedule is mainly applicable for fixed-rate loans only and not adjustable ones.
Types of Amortising Loans
- Personal loans
- Student loans
- Auto loans
- Home loans/ fixed rate mortgage