3 Ways an Amortization Schedule Can Make You a Smarter Borrower

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KEY POINTS

  • An amortization schedule indicates how much a loan will truly cost.
  • An amortization schedule can take the emotion out of a buying decision.
  • Savvy borrowers count on amortization schedules to make the decision that's best for them.


Your financial decisions can be made easier with an amortization schedule.

Amortization schedules may (literally) be the most boring subject anyone will broach with you this year. Stocks are exciting, start-up companies are sexy. Amortization schedules are, well, amortization schedules. So, why are we bringing them up? We want you to know that understanding an amortization schedule can elevate you from "average borrower" to "genius borrower." Here's how.

What is an amortization schedule?

Stick with us here. If you fall asleep at this point in the article, you'll miss all the good stuff.

When you take out a loan, part of each payment goes toward paying the principal, and part goes toward paying interest. Think about it this way. If you took out an interest-free loan for $10,000 with a repayment term of 60 months, you would know exactly how much of your payment was going toward paying down the loan principal. As long as you made a payment of $167 each month, the principal would drop by $167, and the loan would be paid in full in 60 months.

But what if you have an interest rate of 7.25%? From the top of your head, would you be able to figure out how much of your monthly payment is going toward principal and how much toward interest? If so, you're a bit of a rarity.

Most of us count on an amortization schedule to lay out precisely how much of each payment goes toward paying down the loan. It looks like a simple table, but it can be a powerful decision-making tool.

1. You become a borrower understands the true cost of a loan

Let's say you're on a fairly tight budget, but your dream car costs $60,000. You realize that it's more than you should spend, but if you stretch the loan term out to 10 years, the monthly payment looks as though it will be manageable. Yes, you convince yourself, you can afford to pay an APR of 6% and a monthly payment of $667.

And that's where an amortization schedule comes in (and why you'll soon consider it your best friend).

An amortization schedule is like that friend who tells you that you have salad stuck between your two front teeth or that your fly is down. It is brutally honest.

An amortization schedule shows more than how much of your monthly payment will go towards paying down your principal. If you scroll down to the bottom of the page, you'll also see exactly how much you'll pay in interest over the life of the loan. In the case of your dream $60,000 vehicle, it's just shy of a whopping $20,000.

2. You become a borrower with the tools to change course

And, like a good friend, an amortization schedule gives you a gentle slap to the back of the head while encouraging you to rethink your strategy.

If you really want that vehicle, you have a couple of decent options:

  • Wait until you pay down other bills or until you're earning more money and take out a five-year loan instead. Your monthly payment will be $1,160, but you'll pay $9,600 in total interest as opposed to $20,000. That's more than $11,000 extra to save or invest in your future.
  • Wait until you've saved a fair down payment. Let's say you slowly put away enough to make a $10,000 down payment on your dream ride. That would bring your monthly payment down to $967 for five years, and you would pay a total of $8,000 in interest.

3. You become a discerning borrower

Sales people have a job to do. A real estate agent wants you to buy a house, and a car salesperson wants to sell you a vehicle. There is no shame in that. However, when someone tries to say, "Hey! We could extend the loan term and get your payments down," you have an amortization schedule to provide you with the real scoop.

It's your life and your money. You're the one who decides whether to keep money in your bank account or to spend it. You're the one who determines whether or not a loan is right for you at this moment. And an amortization schedule is there to help you make the right decision.

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