What is the Loan Amortization Schedule?
Loan amortization schedule refers to the schedule of repayment of the loan in terms of periodic payments or installments that comprise of principal amount and interest component till the end of the loan term or up to which full amount of loan is paid off.
We can get a clear understanding of this by taking an auto loan or home loan two of its examples. In case of an auto loan, or a home loan, the lender pays off the amount in several installments, which are divided into small amounts to be paid over a specific, much longer period of time by creating a loan amortization schedule.
- Initially, the first few installments that are paid out will go as the interest to be paid. Later, eventually, the installment amount paid will start to compensate for the principal loan amount.
- In this way, within the period of payback, both the interest and the principal amounts to be paid against the loanPrincipal Amounts To Be Paid Against The LoanLoan Principal Amount refers to the amount of money loaned by the lender to the borrower. Furthermore, it is the amount on which the lender charges the borrower interest for fund utilization.read more borrowed by the lender are covered.
- This is the basic idea, and this also applies in the case of a business organization opting for debts to carry out certain of its operation, and this can help the firm run a smooth business with less risk and financial crisisFinancial CrisisThe term "financial crisis" refers to a situation in which the market's key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among investors.read more.
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Source: Loan Amortization Schedule (wallstreetmojo.com)
Schedule of Loan Amortization in Excel (Step by Step)
Let us take a home loan example for preparing a schedule of Loan Amortization in Excel. Let us assume that a home loan is issued at the beginning of month 1. The principal is $1,500,000, the interest rate is 1% per month, and the term is 60 months.
Repayments are to be made at the end of each month. The loan must be fully repaid by the end of the term.
Follow the steps to calculate loan amortization schedule.
- Put the inputs in this standard format given below.
The first step is to input the data in a standard format.
- Find the Monthly Payment or the EMI (Equal Monthly installments)
We use the PMT functionPMT FunctionPMT function is an advanced financial function to calculate the monthly payment against the simple loan amount. You have to provide basic information, including loan amount, interest rate, and duration of payment, and the function will calculate the payment as a result.read more given in Excel to easily calculate the monthly installments here.
Here,
– rate = interest rate (in this example, it is the monthly interest rate of 1%)
– nper = period (in our example, this is 60)
– PV = is the loan amount of $1.5 million
– FV = is the future value of this loan amount ( in our case, we need to fully repay the amount. Therefore FV = 0)
– type = 0 or 1; 0 is payment done at the end of the period (month), and 1 is for payments at the beginning of the period (month). Here we assume that the payment is made at the end of the month.
Note the negative sign in front of the PMT formula. It is because the repayments are cash outflows for us. - Prepare the Loan Amortization Schedule table as given below.
The third step is to prepare the table as given below. Each payment of installments throughout the payback period for the loan amortization comprises of two things, which are principal and interest. The period of time specified as a payback period and the payment per installment is calculated on the basis of the principal and interest amount.
- Calculate the Interest on the Beginning Balance.
- Calculate the Balance before the Monthly Payments
- Calculate the Principal repaid in the month.
- Find the month-end loan balance.
- Link the Beginning balance of next month.
- Complete the Loan Amortization Schedule Excel Table
For the initial few installments, a greater portion of the installments comprises of the interesting part that is to be paid while the principal paymentPrincipal PaymentThe principle amount is a significant portion of the total loan amount. Aside from monthly installments, when a borrower pays a part of the principal amount, the loan's original amount is directly reduced.read more comprises the remaining smaller portion of the installment. With this, your loan amortization in excel is almost complete.
- Check the balance at the end of the period.
As we reach the end of the payback periodPayback PeriodThe payback period refers to the time that a project or investment takes to compensate for its total initial cost. In other words, it is the duration an investment or project requires to attain the break-even point.read more, the portion of the interesting part becomes smaller and smaller, while that of the principal part becomes larger and larger.
Since the loan in this example is fully amortized, the payment done at the end of the 60th month completes the payment of the entire loan amount. This completes your table of loan amortization in excel.
Advantages
The practice of amortizationAmortizationAmortization of Intangible Assets refers to the method by which the cost of the company's various intangible assets (such as trademarks, goodwill, and patents) is expensed over a specific time period. This time frame is typically the expected life of the asset.read more has a lot of advantages and can benefit a business organization in many ways. The method of splitting up a mortgage or debt possessed by the firm can help the firm to repay it having a less stressful time. The loan amortization schedule also helps the borrower to have a good repayment model helping him to pay back the loan without affecting other operations of the firm. As the repayment is made in terms, there is no need to spend a lot of capital at once
Conclusion
An amortized loanAmortized LoanThe amortized loan formula is used to calculate the annual or monthly payments a borrower must make to the lender for the loan they have taken out. Annual interest payments plus the annual portion of the long-term debt make up the yearly payment.read more is always good and can give the borrower or the firm all the benefits, while a not fully amortized loan can be a burden for the borrower at times. The borrower, in turn, should follow the perfect discipline in paying off the interest due within the specified time. Otherwise, he may have to face the problem of negative amortizationNegative AmortizationNegative amortization is when the borrower makes a payment less than the standard installment set by the bank. Therefore, the excess interest amount over the installment amount is added to the principal amount of the loan.read more, making him pay more than what he actually had to.
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