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What is an Amortisation Schedule?
An Amortisation Schedule is a table that shows each payment to be made on a loan. It is one of many documents that both borrowers and lenders can use when managing their loans.
Most schedules include information about payment dates, payment amounts, interest amounts, and the remaining loan balance.
An Amortisation Schedule might also be called a:
- Loan amortisation
- Loan amortisation schedule
- Mortgage amortisation
- Loan payment schedule
How does an Amortisation Schedule work?
Even though you might not be familiar with the term “amortisation,” this accounting principle applies to loans we deal with every day. In simple terms, amortisation breaks down a loan into a series of regular payments over a gradual period.
These regular payments contribute to paying off two main categories:
- Principal, otherwise known as the original sum of money borrowed in a loan.
- Interest, otherwise known as the cost charged by the lender for borrowing the principal.
Each time the borrower makes a payment, a part of the payment goes towards the principal and the interest. In the beginning, most of the payment goes towards paying off the interest. But, as the borrower continues making payments, the principal amount continues to get smaller. As a result, the interest amount will also decrease.
Borrowers may also choose to repay only their loan’s interest through consistent monthly payments. Once the interest-only period is complete, the borrower can transition into a standard amortisation schedule (as outlined above) or pay off the remaining principal with a lump-sum payment (also known as a balloon payment).
Since their regular payments often stay the same, borrowers might forget that their money is allocated differently every month. That’s where Amortisation Schedules come in. These tables are a useful way to keep track of where a borrower’s money is going.
What loans can I use an Amortisation Schedule for?
Amortisation Schedules are typically used for instalment loans with known payoff dates, fixed interest rates, and fixed monthly payments. Examples include:
Why is using an Amortisation Schedule important?
Amortisation Schedules are useful for several reasons. Here’s three reasons you should consider using an Amortisation Schedule to help manage your loan.
1. Understand the breakdown of your loan
Overwhelmed by confusing amortisation formulas? Managing the financial details of a loan doesn’t have to be complicated.
With our Amortisation Schedule, the borrower can easily see:
- Where their payments are going
- How much interest has been charged over the lifetime of the loan
- How much of the loan is remaining
2. Helps with budgeting
It pays to have an organised approach to finances. An Amortisation Schedule clearly lays out expected payments, which makes monthly budgeting a breeze.
Plus, a schedule is a convenient way to keep track of the remaining loan amount, helping borrowers to stay on track for their long-term financial goals and plan for any future investments.
3. Find the loan that is right for you
In addition to being a useful tool for financial management, an Amortisation Schedule helps the borrower understand how much debt they can afford and what kind of loan best suits their current lifestyle.
For example, say you are looking to buy a house. In this situation, you could compare two Amortisation Schedules, one for a 15-year mortgage and the other for a 30-year. By analysing these two tables, you will get a better sense of the financial impact of each loan so you can select the loan that’s right for you.
Types of Loan Amortisation Schedules
Amortisation Schedules are highly customisable and can be modified to reflect the terms of almost any loan.
Amortisation Schedules typically fall into three categories:
- Regular payments to principal & interest: For this loan, the borrower makes regular fixed payments over the life of the loan. Each payment covers both principal and interest.
- Regular payments go only to interest: In this case, borrowers make payments that only cover the interest accrued on the loan. As a result, the principal balance remains unchanged. This schedule often operates only for a specific time frame. Once completed, a standard Amortisation Schedule takes over.
- Lump-sum payment at the end of term: This is also known as a balloon payment. In this schedule, the borrower makes regular payments that are lower than the full amortisation amount. As a result, there will be a remaining sum at the end of the payment period. The borrower makes a larger “balloon” payment, which pays off the remainder of the loan.
What does an Amortisation Schedule include?
An Amortisation Schedule will typically include the following:
- Loan amount
- Loan start date
- Loan end date
- Interest rate and how it’s compounded (weekly, monthly, yearly)
- Payment dates
- Payment amounts
- Amount of principal paid
- Amount of interest charged
- Total interest
- Remaining loan balance
