What Is an Amortization Schedule?
An amortization schedule is a complete table of periodic blended loan payments, showing the amount of principal and the amount of interest that comprise each payment so that the loan will be paid off at the end of its term. While each periodic payment is the same, when you begin repayment, most of each periodic payment is interest. The percentage of each payment that goes toward interest diminishes over time and the percentage that goes toward principal increases. Later in the schedule, the majority of each periodic payment is principal. The last line of the amortization schedule shows the borrower’s total interest and principal payments for the entire loan term. This debt is said to be amortized when it is paid off in equal installments over its term or life.
Calculating the Amortization Schedule
While there are many online tools for calculating an amortization schedule, you should know and be able to complete the calculations manually. Below is an amortization schedule for a business loan of $20,000 at a 9% stated, or nominal interest rate with a five-year term. The business loan is scheduled to be paid off in equal annual payments over the five-year time period. Here is the explanation for how to calculate the numbers in each column:
Column 1: Each year of the loan repaymentColumn 2: The beginning balance of the loan at the start of the year.Column 3: Total payments for the year (interest plus principal)Column 4: Amount of interest paid (loan balance times the interest rate of 9%)Column 5: The amount of principal you’ll pay for the yearColumn 6: The principal you paid subtracted from the balance
Amortization Schedule of a Business Bank Loan
Read your loan documents carefully to understand this provision, and if there are any prepayment penalties or fees charged by the lender for the privilege of paying the loan down early.
