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A loan amortization schedule is the timeline and table with which your loan’s balance decreases based on your expected loan payments. There are many different loan amortization schedules that can be used for a loan. Each type of schedule has a different effect on the size and consistency of your loan’s payments.
Key Points:
- The amortization schedule impacts the size of your monthly payments and whether they change
- Negative amortization is usually bad – it means your loan balance will grow even if you make payments
- Don’t get surprised – some amortization schedules require larger payments at the end of the loan
What is Amortization?
There are two general definitions of amortization.
In the world of lending, amortization describes the process of paying off a loan over time and the schedule at which the loan balance changes.
In accounting, amortization is the process through which a business spreads the cost of an expensive and long-lasting item (such as a piece of machinery) over many accounting periods.
Paying Off a Loan Over Time
When you borrow money, regardless of the type of loan or the reason for borrowing, you’re expected to pay it back eventually. The amortization schedule for a loan describes the plan you follow for paying it back and reducing its balance to zero.
Loans usually involve paying interest. In most scenarios, your regular loan payment will cover the interest that has accrued plus a portion of the principal owed. As time passes, the principal balance will decrease, slowing the rate at which interest accrues and allowing each payment to reduce principal further.
You can view an amortization table to see how the portion of your payment going toward principal increases over time. If you are having difficulty paying off your loan see what happens to business loan if business fails, for more details.
What Is a Loan Amortization Schedule?
A loan amortization schedule is a table that shows how each loan payment is applied to the loan’s principal balance or interest.
For most loans (including most short term business loans), every payment made over the life of the loan is for an equal amount. However, earlier payments will reduce the principal balance by a smaller amount because more interest will have accrued. This is why the early payments on a thirty year fixed mortgage are essentially all interest.
Understanding a Loan Amortization Schedule
When you look at a loan amortization schedule, you can see the amount of each payment, the principal balance when the payment is due, how much of your payment goes toward interest, and the new principal balance of the loan after you make the payment.
Interest accrues on the loan based on the principal balance. With each payment, the principal balance generally will be reduced. That means that over time, less interest will accrue between each payment allowing a greater percentage of each payment to go toward reducing the principal.
Example of Amortization Schedule
Here is an example showing the amortization schedule for a $10,000 loan with a term of one year and an interest rate of 10%.
| Payment Period | Payment Amount | Beginning Balance | Interest accrued | Principal Paid | Ending Balance |
| 1 | $879.16 | $10,000 | $83.33 | $795.83 | $9,204.17 |
| 2 | $879.16 | $9,204.17 | $76.70 | $802.46 | $8,401.72 |
| 3 | $879.16 | $8,401.72 | $70.01 | $809.15 | $7,592.57 |
| 4 | $879.16 | $7,592.57 | $63.27 | $815.89 | $6,776.69 |
| 5 | $879.16 | $6,776.69 | $56.47 | $822.69 | $5,954.00 |
| 6 | $879.16 | $5,954.00 | $49.62 | $829.54 | $5,124.46 |
| 7 | $879.16 | $5,124.46 | $42.70 | $836.46 | $4,288.00 |
| 8 | $879.16 | $4,288.00 | $35.73 | $843.43 | $3,444.58 |
| 9 | $879.16 | $3,444.58 | $28.70 | $850.46 | $2,594.12 |
| 10 | $879.16 | $2,594.12 | $21.62 | $857.54 | $1,736.58 |
| 11 | $879.16 | $1,736.58 | $14.47 | $864.69 | $871.89 |
| 12 | $879.16 | $871.89 | $7.27 | $871.89 | $0 |
As you can see, as time passes, less interest accrues each period, allowing payments of the same size to have a greater impact on reducing the loan’s principal.
Formulas in a Loan Amortization Schedule
Borrowers and lenders use loan amortization formulas to determine the monthly payment for a loan based on its amount, interest rate, and expected repayment period. For example, if you get a thirty-year mortgage for $250,000 with an interest rate of 5%, you can use a loan amortization formula to determine the monthly payment.
You can use these formulas to calculate information by hand or use financial software to calculate for you.
The formula to determine the monthly principal due on an amortized loan is:
Principal Payment = Total Monthly Payment – [Outstanding Loan Balance x (Interest Rate / 12 Months)]
What is an Easier way to Calculate a Loan Amortization Schedule?
The easiest way to calculate a loan amortization schedule is to use a financial program or online calculator to do the math for you. There are many online services that offer amortization calculators that are easy to use. As long as you have details like the loan amount, interest rate, and timeline/term of the loan schedule, you can find information on the monthly payment and amortization.
If you prefer, you can also use the formula above to find the answer by hand.
How do you calculate amortization?
An amortization calculation shows the following pieces of information:
- How much principal and interest are paid with any particular payment
- How much total principal and interest have been paid at a specified date
- How much principal you owe on a loan at a specified date.
- How much time you can save on a loan by making extra payments
That makes amortization calculators very useful. You can use them to learn things such as:
- How much principal you owe now, or will owe at a future date.
- How much extra you would need to pay every month to repay a loan on a specific, faster schedule
- How much interest you have paid over the life of the mortgage, or during a particular year
- How much equity you have
How do I calculate monthly mortgage payments?
If you want to calculate your monthly mortgage payments, or the payments for any loan, use this formula:
Monthly payment = P[r(1+r)n/((1+r)n)-1)]
Where:
- P = the principal loan amount.
- r = your monthly interest rate. Most loans are quoted with annual interest rates, so divide that figure by 12 to get the monthly rate. For example, if your interest rate is 5 percent, your monthly rate would be 0.004167 (0.05/12=0.004167).
- n = number of payments over the loan’s lifetime. To find this, multiply the number of years in your loan term by 12 to get the number of payments for your loan. For example, a 30-year fixed mortgage would have 360 payments (30x12=360).
Methods for Amortization Schedule
While most loans use a basic amortization schedule involving equal payments and a principal balance that declines to zero, there are multiple schedules you can use.
1. Straight-line
Straight-line amortization is the basic method of amortization. You make equal payments each month, decreasing your principal balance over time until it reaches $0.
2. Declining balance
Declining balance amortization is used in business accounting. Under this method of amortization, you reduce the value of an asset by a greater amount in earlier years and by smaller amounts in later years. The amount amortized each year is based on a amortized rate described as a percentage
For example, for a $10 million asset with a amortized rate of 30%, that would amortize as:
| Year | Depreciation | Asset Value After Depreciation |
| 1 | $3 million | $7 million |
| 2 | $2.1 million | $4.9 million |
| 3 | $1.47 million | $3.43 million |
| 4 | $1.029 million | $2.401 million |
| 5 | $720,300 | $1,680,700 |
3. Negative amortization
With a negative amortization schedule, the required monthly payment does not fully cover the accrued interest. That means that, over time, the loan’s balance will increase as interest continues to accrue and not get paid off. This is like paying minimal amounts on a credit card and as such the debt keeps increasing.
Depending on the small business loan terms, there may come a day when you have to begin making payments that start reducing the loan’s balance. This can lead to a significant increase in the monthly payment.
Conclusion
Loan amortization describes how the loan’s balance changes over time as you make the agreed-upon payments. While most loans, including the best short term business loans, use straight-line amortization, it’s good to understand the different schedules that lenders can use and how you can benefit from different loan amortization schedules.
