Amortization is described as cutting down the amount of money to be paid back that a person owe to another person or a bank in the form of a loan. It reduces with each payment every month. Numerous type of loans, especially loan for buying a car or a house, involve amortization. For amortization of loan, the principle payment of loan, including the interest amount, is first divide into monthly payments. Principle payment amount is the amount still left to be paid. With the passage of time, the proportion of interest decreases on the amount repaid each month and the principle amount increases. A table consisting of each and every principle and payment amount of each payment is called as ‘Amortization schedule’.
Following is the step by step guideline that would effectively help in scheduling loan amortization:
- Monthly Principal and Interest Rate Calculation:
First and foremost requirement of calculating amortization or scheduling it is to write down the total specific amount borrowed and the interest on it in the form of percentage and the term of loan. Using this information, one can calculate amortization. Interest rate is annual rate on loan. For amortization convert the annual rate into monthly rate of interest since amortization is monthly calculation by dividing the interest rate by 12 months. After this multiply the principal amount with the monthly rate to get the interest amount of the month. Spread up an excel sheet for this purpose would help in keeping the data.
- Calculation of Amortization for upcoming Months:
Now the principle amount left after paying the amount in the first month, the amount left would be used to calculate the amount of money to be paid in the second month. With each month passing the amount of principle repayment increases from the previous month while the interest rate on this amount decreases.
- Analyze the Amortization trend of whole Term of Loan:
The whole trend must follow a decline in the principle amount originally taken as loan whereas there must be increasing rate of principle repayment amount and a reduction in the interest rate on these payments each month. It continues till the end when the principle amount left would be 0.
- Managing personal Loans:
Using the knowledge about amortization can help a person to calculate his/ her own debts.
Having a sound knowledge about amortization one save money by adopting strategies to lower the interest rate on total amount of loan. It can be achieved by paying as much installment each month as possible. This will help in reducing interest rate on the money. Using amortization or financial calculators on internet one can easily calculate the amount of interest one can avoid through extra payments. Once you put all the relevant information about your loan, it will calculate your monthly payments automatically.
As amortization is basically the amount of loan paid regularly in consecutive installments after a specific interval of time such as after every month. It helps to keep a record of the amount paid and the amount still to be paid, total amount that will go for interest, how and when will the entire loan will be paid etc. In essence, it tells you exactly all about the payment you have to make for the debt money.