When you take out a loan, your lender will likely provide you a breakdown of the payments you’ll need to make throughout your loan term. Take that a step further with an amortization schedule, which provides additional details about your loan, including the amount of each payment that goes toward interest as well as principal.
Amortization Schedule Definition
An amortization schedule breaks down the amount of principal and the amount of interest that comprise each payment until the loan is paid off at the end of its term.
Keep in mind, the term “amortize” means to pay off debt through periodic principal and interest payments.
With amortized loans, your loan payment amount typically remains the same throughout the course of your term. However, the amount of each payment installment that is applied toward principal and interest adjusts throughout the course of your overall repayment period.
Specifically, you’ll generally pay more toward interest at the beginning of your loan. As you pay down your principal, you’ll have less interest to pay in each installment. As a result, more of your payment will be applied to your principal.
An amortization schedule is a great tool for borrowers who like to see the progress of their repayment step by step.
Amortization Schedule vs. Payment Schedule
Compared with an amortization schedule, a loan payment schedule is more basic in form. It simply indicates when you’ll need to make repayments and the amount of each repayment installment.
As you can probably tell, loan payment schedules aren’t as detailed as amortization schedules. Most significant, payment schedules don’t show you how your payment is broken out between principal and interest.
Additionally, while amortization schedules apply to loans that are amortized, payment schedules apply to both nonamortizing as well as amortizing loans. Interest-only loans are an example of nonamortizing loans, while SBA loans are an example of amortized small business loans.
What Does a Monthly Amortization Schedule Look Like?
Monthly amortization schedules may vary slightly, but they often include the following information.
Payment Number (or Payment Month)
The payment number column indicates the installment you’re on, and all of the data in that row of the amortization table would be specific to that installment. Payment 10, for example, would refer to your 10th installment payment due on the loan.
An amortization schedule with dates will indicate when each payment is due. With a monthly amortization schedule, the due date is typically the same each month. For instance, if your first payment began on Feb. 17, your remaining payments would likely fall on the 17th of each month after.
The beginning balance column, shown on some amortization schedules, refers to the total amount of principal and interest you owe at the time that payment number becomes due.
The scheduled payment column refers to the portion of your amortization schedule with fixed monthly payments. This column lists the total loan payment installment amount.
The principal column records how much of the payment goes toward the actual amount being borrowed. This figure will generally increase as payments continue.
The interest column records how much of the payment goes toward the interest that is being charged on the loan.
The ending balance column keeps track of the total amount of interest and principal that remains left for you to pay as it corresponds to each payment installment. Your amortization table will have a $0 ending balance in the last row to show you have completed your repayment process.
Total (or Cumulative Interest)
Total interest shows the total interest you’ve paid (or will have paid) at the completion of each installment payment.
In addition to a monthly amortization schedule, if you have a daily or weekly repayment structure, you can make an amortization table to correspond with your specific loan details. If you prefer, you can also create an amortization schedule with extra payments.
An Amortization Schedule Example
Amortization schedules with start dates will appear as shown in the example below. The table features a start date of 2/17/2020 and shows subsequent monthly payments as well as the interest and principal breakdown per installment. You also can calculate amortization schedule annual payments.
Amortization Schedule with Balloon Payment
In addition to calculating your monthly, weekly or daily amortization schedule, you can calculate an amortization schedule with balloon payment loan terms. With a balloon payment loan, only part of the loan is amortized.
To repay your loan in full, the remaining amount is due as one large sum required at the end of your term. This amount is much larger than the periodic loan installments you make throughout your term. You can find an online amortization calculator that provides an amortization schedule with balloon payment terms.
How to Build Your Own Amortization Schedule
Having an amortization schedule can help you run your business more efficiently by keeping you up to date on how many payments you have left, how much you’re still paying in interest and what date you can expect to have the loan entirely paid off by.
To gain a greater understanding of your financial situation and how to take control of it, consider creating your own amortization schedule if you don’t already have one. Look online for an amortization schedule calculator or amortization schedule creator to see how additional payments can impact your total repayment.
Microsoft Excel, for example, offers a loan amortization schedule template that calculates your specific data based on the following inputs: loan amount, interest rate, repayment period, number of payments per year and starting date.
The more you know about what an amortization table is and how loan payment schedules work, the better prepared you’ll be to make the best financial decisions regarding your business and your future working capital needs.
Benefits of Amortization
Getting approved for a business loan is exciting, but it’s crucial to understand the road to repayment.
With amortized loans, you could pay off your loan early and likely save money on interest. This is particularly true if you’re paying off the loan earlier rather than later in your term.
Compare how much interest you’ll save by using an amortization schedule with extra payments, and see how making additional payments shortens your repayment term. Be sure to check with your lender to determine if any prepayment fees apply.