AMORTIZATION SCHEDULE FOR LOAN

Paying money in fixed installment and at regular interval thereby paying off the loan after certain period of time is known as amortization of loan. In this method both the principal as well as interest are covered. The process by which scheduling of the amortization in such a way that it meets the desired amount of principle plus the interest at a given period of time is known as amortization schedule. It is primarily used in case of mortgages. Amortization in accounting term is defined as spreading of the expenses over a period of time.

Amortization schedule is given by the formula,

Amortization schedule= Total amount/installment amount

Total amount=Principle amount + interest.

The basic difference between amortized loan and interest based loan is that in the interest based loan the monthly installment goes only to the payment of interest, whereas in amortized way of payment monthly installment goes to payment of both interest as well as principle. In interest based method the principle amount is paid as a bulk during the conclusion of the payment, whereas in amortized method even the principle amount is paid as installment.

A payment amortization schedule is financial time table that provides borrower with the detail information about the payment. This schedule includes both the payment timeline as well as the payment amount. There are four types of amortization schedule they are weekly amortization schedule, monthly amortization schedule, semi annual amortization schedule and finally annual amortization schedule. As the name suggest the payment schedule classification is based on the time period after which each payment is made by the borrower.

There is one more type of amortization schedule which is negative amortization. In this method the principle balance increases every month rather than decreasing. In this method the borrower pays only for the few portion of the interest and hence the unpaid amount adds up to the principle. Bank usually does this kind of mortgage collection when they feel that they don’t want to burden the borrower at the initial stage. The balance amount is balanced later period of payment.

Amortization is a method of paying off loan which is widely used by both retail borrowers as well as big industrial borrowers.