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Amortization schedules sound complicated but they help simplify loan payments. This special accounting tool works best with loans paid over a fixed time period according to The Balance. It helps you manage payments, visualize them and better understand the costs. Learn all about amortization with this quick guide.
Before you start using an amortization table calculator or drawing up your own schedule, it helps to better understand what amortization is all about. Simply put, it's a method for paying certain types of loans.
Long-term loans that you pay off over a number of years typically accrue interest along the way. The method for paying those loans over time using small increments of money that goes toward the principal, or the total amount you borrowed, and the interest that's applied to the loan, according to Smartsheet.
Reasons to Set an Amortization Schedule
An amortization schedule is a table of loan payments that shows you the amount of interest and principal that goes into each payment from the time you get the loan until you have it paid off, as noted by Investopedia. The biggest reason to create a schedule like this? It allows you to visualize the amount of interest you're really paying, giving you an effective tool for comparing different loan options.
You could have two loan options: one with a lower monthly payment and one with a higher payment amount, says The Balance. Once you create an amortization schedule, you'll clearly see the difference you'll pay in interest. That can help you make more informed decisions about your loans.
What Goes into an Amortization Schedule?
Before you can create your own printable amortization chart, you need to know all the components that go into the calculations. Smartsheet recommends gathering details like:
- Your loan amount, the total you borrow before taking any interest or payments into account
- The amount of time you'll take paying off the loan, a period usually expressed in years
- The annual interest rate
- The frequency you'll make payments, which could be weekly, monthly or yearly depending on the loan
- The total number of payments required to pay the loan
Loans That Get Amortized
You wouldn't get a free amortization chart or spreadsheet for credit cards. Amortization schedules are designed for loans with fixed payment amounts spread over time. This most commonly applies to monthly payments for loans like auto, home and student loans, as noted by The Balance. It's important to note that the payment amount itself remains the same throughout the life of the loan, but the amounts going toward principal and interest differs.
Tips for Setting an Amortization Schedule
Now that you know more about amortization and what goes into an amortization schedule, consider creating your own free amortization spreadsheet. You can use software like Excel or Smartsheet. The Balance recommends creating it by hand using a few basic steps:
- Start by noting the total loan amount
- Calculate the interest for each loan period.
- Subtract the periodic interest charge from your payment amount to calculate the amount of principal you're paying
- Reduce the loan balance by the amount of principal you paid to figure out the loan balance.
- Repeat the formula until you've figured out the payments for the life of the loan
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Source: https://www.askmoney.com/loans-mortgages/how-set-amortization-schedule?utm_content=params%3Ao%3D1465803%26ad%3DdirN%26qo%3DserpIndex