When you take a loan, you get a statement about the repayment of the loan. It consists of your monthly dues you need to pay to the bank. This statement is called the amortization schedule.
It has many numbers and most of the times people struggle to understand. However you need to know how you are paying your debt and it is all in the amortization schedule.
Before going on to understand the said statement, we need to understand the meaning of a few basic terms used in the amortization schedule. They are:
- Principal: The amount of loan you have been granted from the bank. For example if you apply for a $20000 loan then your principal is the sum that has been granted by the bank. In this case it will be $20000.
- Interest rate: This is the money charged by the bank for the loan. Since you are using the bank’s money they will charge you a fees and that is interest rate. It is a percentage of the principle.
- Term – The period for which loan is granted is known as the term. The amortization schedule is made as per the period.
- Amortization – It is the breakdown of repayment in installments over a period of time that is the loan term/tenure. A schedule is a table that shows the amount payable every cycle.
|Installment No.||Due date||Opening Principal||Installment||Principal Component||Interest Component||Closing Principal||Rate of Interest|
An Amortization Schedule
Due Date – The date you need to pay the installment amount. It is same date every month till the loan is repaid.
Opening Principal – The amount due out of the loan amount. This does not include the interest amount.
Installment – The monthly payment that is to be made every cycle.
Principal Component – The amount of principal being paid in the installment. It is generally less initially and increases later.
Interest Component – The part of payment of interest on loan. It is more in the beginning and NIL in the last installment.
Closing Principal – The Principal left after payment of each installment.
Rate of Interest – It is a percentage of Principal you need to pay for the loan.
The most important part is the installment and it depends on the tenure and rate of interest. If you can understand these basic things, understanding amortization schedule is easy.
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