हिंदी में पढ़े
The term ‘amortization’ means repayment of debt by way of fixed payments over a specified duration.
An amortization schedule refers to a detailed table of recurring loan payments that contains a bifurcation of the principal component and the interest charged in an EMI till the loan is completely repaid. Each EMI i.e. equated monthly installments are of same amount, but the earlier installments in the schedule comprise of a higher amount of interest and lesser principal and vice versa. The total interest and the principal payments made by the borrower during the term of loan appear in the last line of the schedule.
With each passing installment, the proportion of interest reduces whereas the principal portion increases when compared with the previous installment. For example: In case of a Rs. 5,00,000 loan, with an interest rate of 8% p.a. for 10 years, the monthly installments in an amortization schedule will appear as given below:
| Installment No. | Installment Amount | Principal | Interest | Total Interest | Balance Principal |
| 1 | Rs. 6,066 | Rs. 2,733 | Rs. 3,333 | Rs. 3,333 | Rs. 497,267 |
| 2 | Rs. 6,066 | Rs. 2,751 | Rs. 3,315 | Rs. 6,648 | Rs. 494,516 |
| 3 | Rs. 6,066 | Rs. 2,769 | Rs. 3,297 | Rs. 9,945 | Rs. 491,747 |
| 4 | Rs. 6,066 | Rs. 2,788 | Rs. 3,278 | Rs. 13,223 | Rs. 488,959 |
Preparing an Amortization Schedule
An amortization schedule can easily be prepared using the basic loan information i.e. loan term, total no. of periodic payments to be made, rate of interest and the monthly installment amount. Let us see this using the above given example where the loan amount is Rs. 5,00,000, rate of interest is 8% p.a. for 10 years and the monthly payment to be made amounts to Rs. 6,066. In order to calculate the interest portion in first month’s EMI multiply the loan amount with the interest rate. Since the rate of interest given is per annum, it needs to be divided by 12 to calculate the monthly interest. Thus, (5,00,000*.08/12) would yield the interest for first month i.e. Rs. 3,333. The principal component paid can be calculated by deducting this interest from the monthly installment i.e. (Rs. 6,066-3,333) which comes out to be Rs. 2,733.
Deduct the amount of principal paid in first installment from the loan amount to arrive at the fresh loan balance. For calculating the next month’s interest and principal amount in the installment, the above calculation needs to be repeated taking the fresh loan amount into consideration.
Reiterate the above steps till the amortization schedule has been created for the whole tenure of loan.
There are numerous amortization calculators available online that can help you to calculate the monthly charge that shall be applicable just by providing the loan amount, interest rate and the tenure of loan. Using these calculators, the periodic payments that shall be required to be paid for that particular loan can easily be calculated.
Loan Amortization
Under loan amortization, the borrower makes payment of fixed amounts at fixed intervals. These periodic payments comprise of principal as well as interest. The installment paid is first allocated towards the interest accrued and the remaining amount is then allocated towards the principal. It is contrary to certain loan types such as balloon payment where only interest is paid during the whole tenure and the principal component is paid in lump sum at the end of loan term, etc.
Home loans, auto loans or personal loans are few examples of an amortized loan. Credit cards or revolving debts do not fall under the amortized loan category since neither they have a fixed loan amount nor do they have a defined amount of periodic installments.
Must Read: Personal Loans: Which is better between fixed and floating interest rate?
How are principal and interest related?
As stated earlier, interest is calculated taking into account the outstanding principal component after the payment of the last installment. Thus, the interest portion decreases with each payment made. Since the remaining amount of installment is assigned towards the principal, the principal portion would increase with each payment. Thus, interest and principal are inversely related when talked about in the periodic payments during the complete tenor of an amortized loan.
Amortization Table
An amortization table contains the respective amounts of principal and interest for each cycle. The periods are listed row wise, whereas, the columns depict latest loan balance, overall monthly payments, interest portion and principal component. The closing outstanding balance of one period turns into the next month’s current loan balance.
Fully Amortizing Payment
Under a fully amortizing payment of loan, the loan is completely paid off by the completion of its term, if the borrower makes the repayments as per the amortization schedule.
Fully Amortizing Payments as opposed to Interest-Only Payments
As said earlier, under a fully amortizing payment, the loan is repaid by the end of loan term if payments are made as per the amortization schedule. It is so because the periodic payments include interest as well as principal component. The ratio of principal component in each monthly payment increases and interest component decreases with each passing instalment. Contrary to this, if a borrower is not making fully amortizing payments at the initial stage of loan, he will have to make payments at a much higher rate, at a later stage.
Thus, we can conclude that the amortization schedule is of high significance. It helps the borrower to analyze and calculate the outstanding loan amount, interest to be paid there upon. It also enables the calculation of total interest paid during the life of loan. Bifurcation of payments into interest and principal component can easily be seen for each periodic payment.