What Exactly is an Amortization Schedule?
This is a schedule showing the repayment period of the loan you have taken. It is basically a table that determines the principal amount and amount of interest compromising each payment. The table continues and ends until the loan is paid off. The early majority amount is of interest while later the amount of principal loan is in the schedule. In addition the last line of the schedule determines the principal payment and total interest for the loan.
Furthermore, the schedule is somewhat similar to the depreciation; the only difference between them is of the loan. This is why both of them have similar methods too. To be precise, this table is the sum of principal amount and interest amount for the loan. Lenders and borrowers use it for the installment loans to pay off the debts either for the car loan, mortgage or home loan.
Terms About Amortization Schedule You Must Know
To properly understand the amortization table, you must know about all its terms and definitions.
Principal Loan Amount
This is the amount that is being lent by the lending institution as a loan. It does not include any additional charges, fee or interest.
Period of Loan
This is the time that you take to pay back the entire amount of the loan. This time duration is actually the negotiation in between the borrower and lender. Normally, both of them prefer to keep the time period small because the longer time period has more risk associated.
This is the total amount inclusive of interest, fees, and principal amount that a borrower is required to pay to the lending institution.
Rate of Interest
Rate of interest is the value of the payment accrued on the loan. Rate of interest is generally on yearly basis. It can either be fixed or vary depending upon the terms and conditions of the loan. Variable interest is based on the index rate while fixed interest is fixed and does not vary because of the market fluctuations.
Annual Interest Rate
Annual Interest Rate is also called as Annual Percentage Rate. It is considered as the true meter of the cost of the loan. It simply includes the fees, rate of interest, and taxes payable in the loan. Asking about the APR rate simply will help you in knowing the cost of the loan.
This is normally seen on a loan amortization schedule on excel. IT is the amount of dollar total of all interest payment on the loan.
This is the amount of money in cents determining how much the ender will collect on a dollar that is being borrowed on full term loan. It is usually used for short term loans.
This is beginning balance in the table is the amount of dollar owed on a loan after the payment has been made during the loan time period of loan.
The owed amount that is remaining at the end of the time period after the payment has been made during the period of loan.
Types of Amortization Schedule
The type of amortization schedule on excel depends on how frequently interest is compounded on the loan i.e. monthly, weekly or daily. Depending on the type, you can make payments accordingly on the basis of the compounding interest. Here are the types that you need to know.
Monthly Loan Schedule
In this form, the traditional multi-year medium term loans having monthly payments. In this type of monthly schedule, you will have to calculate the paying back period on a monthly basis. These loans will have a separate set that would be agreed upon the monthly payment.
Weekly Loan Schedule
As the name determines, in weekly loan schedule you have to calculate the loan on weekly basis. But before you take the plunge to work on it for the weekly loan schedule; you must know that you need to pay attention to the loan’s frequency of compounding.
Sometimes, the weekly payments compound interest on a daily basis offering a weekly payment option for the borrower’s convenience. But there are some who offer compound interest weekly. Consequently, you must always check your loan agreement to ensure using the right schedule for calculating the loan.
Daily Loan Schedule
Just like weekly and monthly schedules, the daily loan schedules are short term loans. They usually range from 3 to 18 months. The profit of the lender is based on the factor rate which means that you will have to pay back the rate of cents for the borrowed amount. When you daily amortize the loan, the interest will be compounded on a daily basis i.e. from Monday through Friday but not Saturday and Sunday (bank holidays). In this way, you will be able to make 20 to 22 payments on a monthly basis, depending upon the days of the month.
Scheduling Extra Payments in Amortization Schedule
When you have extra payments in hand, you either choose to schedule extra payments in a lump sum or at regular intervals in the loan schedule. The advantage of making extra payments can help you in saving money in compounding interest and reduce the length of your loan too. Let’s explore the three different ways in which one can make extra payments.
Regular Extra Payments
These are the extra payments that you pay along with the agreed monthly installments or payments. For example if you agreed upon paying $1431.31, you may choose to pay $1500 instead on a monthly basis. Since the difference is $68.69, it will go in the extra or additional amount. On your monthly loan schedule, you will schedule extra payments in it. Thus you will be able to see its impact on the table. Also, you will see that this extra or additional amount will reduce the time period of loan with two years reducing the total interest being paid on the loan.
Occasional or Sporadic Extra Payment
If you are running a business where the profit and cash flow fluctuates more often, like a seasonal business, then you may experience occasional times, to affording to schedule extra payments on your loan. For example, you have taken a loan of $200,000 for your Christmas Tree business. During the month of December, your sales increase and you can afford to make extra payments of $2000 every January. In order to calculate the impact of this occasional extra payment, you will have to manually schedule this extra payment into the table. By the end of the month, you will see that your loan has been reduced and you have saved your money.
Lump Sum End Payment
Some business owners wish to finalize and settle the loans as quickly as possible; therefore they pay off the entire loan amount in one attempt, trying to get over with it at once. Also, some business owners whose business is very established follow this act. Regardless the reason, if you really have cash on hand and wish to pay off the lump sum amount to finish the loan early, then you will no interests rates to pay. In addition to this, you will be at peace of mind too, finishing the loan. For example, if you have taken a loan of $500,000, your loan schedule on excel will show a zero interest rate, reducing the loan period and saving the rest of your money.
There is no doubt that value of scheduling the extra payments depends upon the amount of frequency. Keeping extra money here or there; does not really make a big difference. But every extra dollar puts down the debt toward reducing the time period and saving money for you. If you wish to schedule extra payments in regular, seasonal or lump sum form, you can go to the loan schedule to compute the impact on the total length of the period and cost of your loan.
There are certain contractors who include penalties for the early payments. In this penalty, you will have to bear if you decide to pay the entire amount of the money in one attempt or finish the loan at once. The reason behind keeping this penalty is to secure the position of the lending institution or lender, so that they do not have to sacrifice on the profit. Consequently, you must always double check your loan agreement for any penalty clauses before taking the plunge or deciding to schedule payments.
Common Methods Used to Develop Amortization Schedule
The table is used by companies to spread the cost of an asset through its estimated life, hence providing a more accurate picture of the financial health. Here are the different methods used to calculate amortization..
Straight Line Method
This is one of the most common methods used to calculate amortization. It provides benefits and costs over the useful life of the asset, such as a piece of equipment or machinery. To calculate the value, you need to take out the difference of the scrap value and amount at which the equipment was purchased and divide it with its estimated useful life in years.
Double Declining Balance Method
Double declining balance method is the method which uses assets that lose value in the early years, or if the owner wants to enjoy the tax benefits early. In order to calculate the amortization with this method, you can simply double the result obtained from the straight line method. Take out the difference of the initial cost and scrap value, divide it by the useful life in years and double the result.
Some of the loan payments include balloon payments. In this form of method, the remaining balance of the loan comes after the portion of annual payments. This form of method is used when a business does not have repayment capacity instead it has limited repayments capacity in the early years. The length and times of the table can be designed as per the preference of individuals.
Quick Guide to Making an Amortization Schedule
Here’s a quick guide to making the table..
- Open Microsoft excel sheet with a new spreadsheet
- Mention labels in cells downwards
- Create information related to your loan
- Mention the loan interest rate in form of a percentage
- Calculate the amount of your payment using the formula for the chosen method
If you also want to make an amortization schedule of any type, you can download free amortization schedules from our website. All you need to do is to edit the excel file, and get the results!
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