An amortization schedule is a detailed table that shows how each loan payment is divided between interest and principal over the life of the loan. It provides a clear view of how the debt decreases over time.
What It Includes
- Payment Number: The sequence of payments (e.g., month 1, month 2).
- Payment Amount: The total due each period, usually monthly.
- Interest Portion: The part of the payment that covers the lender’s charge for borrowing.
- Principal Portion: The part of the payment that reduces the loan balance.
- Remaining Balance: The amount still owed after each payment.
How It Works
At the beginning of the loan, a larger portion of each payment goes toward interest. Over time, the interest portion decreases and the principal portion increases. The amortization schedule shows this gradual shift until the loan is fully repaid.
Why It’s Useful
An amortization schedule helps borrowers understand how their payments are applied, plan for long-term costs, and compare different loan options. It is also a valuable tool for seeing how extra payments could shorten the loan term and save interest.
Final Thoughts
Reviewing an amortization schedule is an essential step before taking a loan. It gives transparency on payment structure, total interest costs, and helps in making informed financial decisions.