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Definition: Amortization Schedule
The amortization schedule is basically a periodic, fixed repayment schedule for debt such as repayment of loans and mortgages. The amount to be paid is calculated through the amortization calculator. The amortization schedule can be used to determine principal in each payment versus the percentage of interest. Since the payments are divided into equal amounts, this makes it one of the simplest repayment models.
As in case of any loan, the repayment consists of the principal amount and the interest charged. Although the schedule divides the amount into equal parts, majority of each periodic payment is interest. During the initial period, the percentage of each payment going towards interest is higher than that which goes towards the repayment of principal amount, and then this percentage keeps on decreasing as we move towards the end of the repayment period. This is to say that a larger portion of each payment goes towards interest in the early repayment stages and as the loan matures, greater portions go towards the principal amount, commonly known as Equated Monthly Instalment (EMI). Thus the amortization schedule can be used to identify the amount which goes towards both, the interest and the principal, during each payment.
The amortization schedule can be used if the principal amount, interest rate and the term of the loan are known. Consider the following example:
Principal amount = Rs. 10000
Interest rate = 10% pa
Tenure (Number of EMIs) = 6 months
Hence one can use this table to plan. One can figure out how much he/she will owe after any number of instalments. One can even use the table to figure out if it makes sense to refinance.
The amortization schedule works only for amortizing loans like home loans and car loans, as mentioned above, since the repayment amount is fixed. It cannot be used for repayment of loans such as credit card payments in which one may borrow more than once (whenever a purchase is made using the credit card) and one can make irregular repayments (either make the minimum payment or repay the whole amount together).