Question

OQ3.13. What is the purpose of a loan amortization schedule? Explain briefly and give examples.

Answer 1

Amortization schedule is a table that is used to present the periodic loans payments which is the principal amount and the amount of interest that is comprised in each payment till the loan is completely paid off by the end of its term. Lenders can keep a track on the amounts they owe as well as when they become due. They are also used to forecast the outstanding balance of the loan or interest at any point of time in the life of the loan. Mostly, such tables are used in the case of instalment loans that have payoff dates that are known when the loan is take such as a car loan or a mortgage loan.

In the initial portion of amortization table, the payments include the interest portion of the loan. Later on, the payments apply to the principal portion of the loan This means that, with each payment, the percentage of interest in the payment portion continually decreases whereas the percentage of princiapal amount in the payment portion increases continually with each payment. This means the balance of the principal of your loan will not decrease much in the earlier part of your repayment schedule.

Though the amount of principal and interest amount varies with each month, the total payment of every month remains the same.

Eg: The first few lines of an amortization schedule for a $250,000, 30-year fixed-rate mortgage with a 4.5% interest rate looks like this:

Month	Month 1	Month 2	Month 3
Total Payment	$1,266.71	$1,266.71	$1,266.71
Principal	$329.21	$330.45	$331.69
Interest	$937.50	$936.27	$935.03
Total Interest	$937.50	$1,873.77	$2,808.79
Loan Balance	$249,670.79	$249,340.34	$249,008.65