Amortization Table (Loan) - Explained
What is a Loan Amortization Table?
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What is a Loan Amortization Table or Schedule?
An amortization table is defined as a document that shows you how much you are paying each month on a loan. An amortization table shows the payment schedule which is given when a loan is granted and approved. This is a summary of every payment that is borrowed, which must be made during the lifespan of the loan.
How is an Amortization Table Used?
Whenever one acquires a loan it's important that all the details are known. There are many parts to a loan that should be understood. This includes the interest rate, the term, and the amount of all monthly payments as well as the total which will be paid. This information will allow you to make an informed decision to make sure you are in control of your finances. When you apply for a loan all of this information will be located in a summarized form on an amortization table. In the simplest of terms, this is a depreciation table that shows a breakdown of all payments which must be paid in order to settle the loan. Additionally it will show the dates these payments must be made. When a loan is acquired it is necessary to pay any interest for this money, unless there is an interest free period. Amortization tables are tools that allow you to understand more information about your loan. You should take advantage of these useful tools. Why? This is because mostly the loans are medium or short term. The information in an amortization table allows you to know exactly what your payment each month will be to help you settle your debt and what percentage goes into the interest. When you have a loan and feel like the debt doesn't seem to be decreasing or that the payments you are making are not making a differences, you can check the amortization table to help you better understand the status of the loan. There are a few different types of amorziation tables. The most common of them is known as the French method. What does this method consist of? The way the information is presented in this method is really simple. This is because the monthly payment does not change, every month it will remain the same. What does change is the percentages which are allocated to the debt and interest. When you pay more monthly the amount paid will allow the debt to become smaller and the interest will decrease as well. You have already seen how using an amortization table can help you to better manage your finances when it comes to taking control of your loan, but they are also useful for other things. Consider this scenario, you are ready to buy a house and start looking for various options to learn which bank you could acquire a reasonable mortgage from. When you make a request for the information, it's likely you will receive all vital information through an amortization table. This can help you to compare between the different options and choose the one that is best for you. According to your situation and financial goals, an amortization table can help. A detailed amortization table consists of five different columns. The first column of the table is the period. Each period is in reference to when the payment must be paid. The second column is called interesting. This is where the interest of the loan paid to the lender in each period is seen. This is calculated by multiplying the interest rate and the balance. The interest can be either variable or fixed. The third column is amortization of capital. This consists of the repayment of the loan without any interest. This is what is taken from or deducted each period repayment off the outstanding balance. The fourth column is the capital of the loan which is pending in amortization. To calculate this the outstanding capital and the amortization are then subtracted. The repayment of loans can be completed in a few different ways. The most common are:
- Through the constant capital amortization. The fees which must be paid each time will be lower because the interest is lower over time. This is also known as the French method or Progressive method.
- Through constant quota. This is when the fee that must be paid remains the same while the amortization of the loan is decreased at the beginning and larger at the end.
- Through a constant capital amortization (the third column, as in the graphic example). The fee to pay each time is lower since the interest is lower as time passes. It is also known as the French method or progressive (quota) method. This is the most common method for paying a fixed rate mortgage.
- Through what is known as a single amortization. The end of the loan which is known as the American method. This is when the interest paid during the life of a loan and also at the end of the loan. An example of this is when the interest and principal of bonds is paid.
An amortization table also may have different implications depending on the interest rate.
- If the interest is fixed, the amortization table is definitive and real from the beginning. The payment table which is established when the loan is granted is then applied
- If the interest rate is otherwise variable, the amortization table is just a simulation. This means it is a forecast of payments but will not show the final payment tables because the interest rate begins to change over time.
Financial institutions must provide all of this information to you as a customer, this is a requirement. When a loan has a fixed interest rate, it's important to request this information at the beginning of your loan period, since it will not change over time. When the interest rate is variable, the amortization table will also vary so you will want to continue to request it periodically throughout the loan period. The amortization table refers mainly to the repayment of the loan, as we defined previously. But this type of concept can also be used for any other type of amortization. Many companies will often establish the amortization on their fixed assets to help determine the life of various elements. Amortization tables are useful pieces of information when you are working with loans. You can think of them as a crystal ball that allow you to see the future of your loan and understand how your credit will change over time with the payments of the loans.