How Is a Loan Amortization Schedule Calculated?

by Dan Caplinger | Feb. 4, 2019

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Three puzzle pieces with a car, washing machine and house are attached, while a fourth piece with a wad of money is detached.

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There are many different types of loans that people take. Whether you get a mortgage loan to buy a home, a home equity loan to do renovations or get access to cash, an auto loan to buy a vehicle, or a personal loan for any number of purposes, most loans have two things in common: They provide for a fixed period of time to pay back the loan, and they charge you a fixed rate of interest over your repayment period.

When you take out a loan with a fixed rate and set repayment term, you'll typically receive a loan amortization schedule. This schedule gives you important information about how much your monthly payments will be, and it lets you calculate the total amount of interest that you'll pay over the course of the loan as well as the speed with which you'll pay down the loan's principal balance. By understanding how to calculate a loan amortization schedule, you'll be in a better position to consider valuable moves like making extra payments to pay down your loan faster.

What is a loan amortization schedule?

A loan amortization schedule gives you the most basic information about your loan and how you'll repay it. It typically includes a full list of all the payments that you'll be required to make over the lifetime of the loan. Each payment on the schedule gets broken down according to the portion of the payment that goes toward interest and principal. You'll typically also be given the remaining loan balance owed after making each monthly payment, so you'll be able to see the way that your total debt will go down over the course of repaying the loan.

You'll also typically get a summary of your loan repayment, either at the bottom of the amortization schedule or in a separate section. The summary will total up all the interest payments that you've paid over the course of the loan, while also verifying that the total of the principal payments adds up to the total outstanding amount of the loan.

How to calculate a loan amortization schedule if you know your monthly payment

It's relatively easy to produce a loan amortization schedule if you know what the monthly payment on the loan is. Starting in month one, take the total amount of the loan and multiply it by the interest rate on the loan. Then for a loan with monthly repayments, divide the result by 12 to get your monthly interest. Subtract the interest from the total monthly payment, and the remaining amount is what goes toward principal. For month two, do the same thing, except start with the remaining principal balance from month one rather than the original amount of the loan. By the end of the set loan term, your principal should be at zero.

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Take a simple example: Say you have a 30-year mortgage for $240,000 at a 5% interest rate that carries a monthly payment of $1,288. In month one, you'd take $240,000 and multiply it by 5% to get $12,000. Divide that by 12, and you'd have $1,000 in interest for your first monthly payment. The remaining $288 goes toward paying down principal.

For month two, your outstanding principal balance is $240,000 minus $288, or $239,712. Multiply that by 5% and divide by 12, and you get a slightly smaller amount -- $998.80 -- going toward interest. Gradually over the ensuing months, less money will go toward interest, and your principal balance will get whittled down faster and faster. By month 360, you owe just $5 in interest, and the remaining $1,283 pays off the balance in full.

Calculating an amortization schedule if you don't know your payment

Sometimes, when you're looking at taking out a loan, all you know is how much you want to borrow and what the rate will be. In that case, the first step will be to figure out what the monthly payment will be. Then you can follow the steps above to calculate the amortization schedule.

There are a couple ways to go about it. The simplest is to use a calculator that gives you the ability to input your loan amount, interest rate, and repayment term. For instance, our mortgage calculator will give you a monthly payment on a home loan. You can also use it to figure out payments for other types of loans simply by changing the terms and removing any estimates for home expenses.

If you're a do-it-yourselfer, you can also use an Excel spreadsheet to come up with the payment. The PMT function gives you the payment based on the interest rate, number of payments, and principal balance for the loan. For instance, to calculate the monthly payment in the example above, you could set an Excel cell to =PMT(5%/12,360,240000). It would give you the $1,288 figure you saw in that example.

Why an amortization schedule can be helpful

There are many ways that you can use the information in a loan amortization schedule. Knowing the total amount of interest you'll pay over the lifetime of a loan is a good incentive to get you to make principal payments early. When you make extra payments that reduce outstanding principal, they also reduce the amount of future payments that have to go toward interest. That's why just a small additional amount paid can have such a huge difference.

To demonstrate, in the example above, say that instead of paying $1,288 in month one, you put an extra $300 toward reducing principal. You might figure that the impact would be to save you $300 on your final payment, or maybe a little bit extra. But thanks to reduced interest, just $300 extra is enough to keep you from making your entire last payment. In other words, $300 now saves you more than $1,300 later.

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Be smart about your loans

Even when your lender gives you a loan amortization schedule, it can be easy just to ignore it in the pile of other documents you have to deal with. But the information on an amortization schedule is crucial to understanding the ins and outs of your loan. By knowing how a schedule gets calculated, you can figure out exactly how valuable it can be to get your debt paid down as quickly as possible.

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