Loan Amortization is the gradual repayment of a debt over a period of time. In order to amortize a loan, your payments must be large enough to pay not only the interest that has accrued but also to the principal.
As per Wiki – “In banking and finance, an amortizing loan is a loan where the principal of the loan is paid down over the life of the loan (that is, amortized) according to an amortization schedule, typically through equal payments.”
In simple terms, Amortization happens when you pay off a debt over time with regular, equal payments. With each monthly/quarterly payments a portion of the money goes to the principal amount and the other to interest amounts.
Generally, your interest costs are at their highest at the beginning of the loan. Especially with long-term loans, the majority of each periodic payment is taken as an interest expense. You only pay off a small piece of the principle amount.
As time goes on, more and more of each payment goes towards your principal (and you pay less in interest each month).
Amortizing a loan usually means establishing a series of equal monthly payments. This will provide the lender with the following:
- Interest based on each month’s unpaid principal balance, and
- Principal repayments that will cause the unpaid principal balance to be zero at the end of the loan.
The amount of each monthly payment is identical. The interest component of each payment will be decreasing. The principal component of each payment will be increasing during the life of the loan.
An amortization schedule is a table with a row for each payment period of an amortized loan.
Each row shows the amount of the payment that is needed to pay interest, the amount that is used to reduce principal, and the balance of the loan remaining at the end of the period.
In other words, a schedule which shows repayment broken down by interest and amortization and the loan balance.
Schedules prepared by banks/lenders will also show tax and insurance payments if made by the lender.
I have created an easy to use Loan Amortization Template with preset formulas. Just, you need to input your loan amounts and dates and it will calculate everything.
Let’s discuss the template contents in detail.
Content of Loan Amortization Template
The first row of the sheet consists of the heading of the sheet.
This template consists of 2 major sections:
- Data Input Section
- Payment Schedule Section
1. Data Input Section
Data input section consists of two columns with predefined formulas. You just need to enter the data in the column on the left side.
In this section, you will input the Principal amount you want to borrow or you are planning to borrow. Then comes the rate of interest of the lending bank or institutions.
Generally, the payment schedule is every month so the number of payments per year will be 12.
You need to provide the start date of the loan which will eventually calculate the repayment dates.
If you are planning for any extra payments along with your installments then you can enter it in the Optional payments cell.
At the end, you have to enter the Lender/Banks name.
The columns on the right-hand side will display the scheduled payment, number of installments, total interest etc.
That is all you need to enter and the template will show you the schedule of repayment.
Isn’t it very simple?
2. The Payment Schedule Section
This section consists of the payment schedule. It will be displayed once you enter the details in the data input section.
The payment schedule will automatically display the scheduled dates of repayments, the beginning balance, total payment, interest & principal payments, & end balance for each period.
We thank our readers for liking, sharing and following us on different social media platforms, especially Facebook.
If you have any queries or questions, share them in comments below. I will be more than happy to help you.