Question

What is a loan amortization schedule, and what are some ways these schedules are used?

Answer 1

A Loan Amortization Schedule shows the detailed break up instalments into principal payments and interest payments till the closure of loan. A typical amortization schedule will look like:

Date of payment	Opening Loan Balance	Interest Payment	Principal Payment	Total Payment	Closing Loan Balance
				P	A
	A (this will be same as closing balance in the last row)			P(this amount is constant in the payment)

An amortization schedule specifies the amount of periodical payment (monthly, quarterly, annually or any other periodicity) has been charged as interest and the remaining part of the periodical payment is appropriated as principal adjustment. Since, with every payment closing balance of the loan will reduce, therefore, interest charged on every subsequent payment will be lesser than the previous payments and amount adjusted towards principal will keep on increasing with every periodical payment. Thus, towards the end of loan a larger part of periodical payment is adjusted towards principal.

Amortization schedule helps to ascertain the loan outstanding after making any periodical payment. These schedules also help to identify the amount of principal repaid or interest paid during a particular period of time. In case, any component of the payment (principal or interest) can be utilized for tax exemption, amortization schedule helps to determine the amount paid towards that component. It provides a clear picture to the borrower of how the loan is reducing.