Amortization is the process of paying off a debt into a series of fixed payments. The payment is made up of parts that change over a period of time. The last payment will pay off the final amount remaining on your debt. An amortization schedule provides details about your loan including the amount of each payment that goes toward interest as well as principal.
An amortization schedule is a tool used by borrowers so they can see the progress of their payment with each step of amortizing a loan. The principal of an amortizing loan is paid over the life of the loan which has an equal amount of payment every period.
In the beginning of the loan, you will pay more interest. The interest starts to decrease as you pay down your principal which results in more of your payment will be applied to your principal.
Periodic payments are made for amortizing loans which include interest charge and principal repayment. The interest percentage or principal repayment varies for different loans.
There are different methods to amortize a loan which lead to different amortization schedules.
Straight line amortization is commonly used in accounting because of how simple it is. It is where the total interest amount is distributed equally over the life of a loan. With fixed periodic total payment and interest amount, the principal repayment is constant over the life of the loan.
This method is an accelerated method of amortization where the periodic interest payment declines, but the principal repayment increases with the age of the loan. The declining loan balance leads to low interest charges which in turn accelerates the repayment of the principal.
A loan amortized in the annuity method has a series of payments made between equal time intervals and they are made in equal amounts.
The periodic payments of a bullet loan cover the interest charges only. The balance outstanding of a bullet loan remains unchanged over the life of the loan is lowered immediately to zero at maturity.
A balloon loan is similar to a bullet loan which the entire principal maturity is repaid. It is amortized with small amounts of principal repayments but leaves the majority paid at majority.
This is where the total payment of a period is lower than the interest charged for that period. The remaining interest charge will accumulate to increase the outstanding balance of the loan.
There are lots of types of loans available which work in different ways.
There are loans that also do not get amortized such as:
An amortization schedule breaks down the loan payments you have each month and shows what you will be putting toward principal and interest in each payment. As mentioned above, certain loans can be amortized and others cannot.