It’s understood that one way or another, anyone who accepts either small business funding or a small business loan, repayment will need to be made. You may be aware of the different options available to you for repaying your funding partner, but how familiar are you with an amortization schedule or the ins and outs of a payment schedule?
Getting approved for a loan is exciting, but it’s important that you understand your road to repaying it and whether you’re more comfortable with a more traditional payment schedule or a loan table. Both types of repayment schedules offer you the information you need to keep track of your progress but they present them in different ways.
In this article, we’ll walk-through what is an amortization schedule, what is a payment schedule, how to interpret an amortization table and the key differences between amortization and payment schedules. Let’s begin with payments scheduled and what you need to know.
What is a Payment Schedule?
When compared to an amortization schedule, a payment schedule is simply a payback schedule that indicates when and where you’ll need to make repayments. Each schedule clearly shows the dates of your payments, similar to the way we broke down the amortization table in the last section.
A payment schedule is perfect when you need to get right to the point. However, if you’re someone who needs additional information, payment won’t be able to provide you all the detail you’re seeking. Payment schedules are direct but not as enlightening for the borrower
Another thing payment schedules do not show you how your payment is broken out between principal and interest. They provide a visual for you to see what portion of your payment is going toward the funds you’ve borrowed and what portion is going towards the interest added to the loan.
What is an Amortization Schedule?
According to Investopedia, the answer to “what is an amortization schedule?” is, ‘a complete table of periodic loan payments, showing 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.’
In a scheduled amortization, your amortization payment is composed of both the principal payment and the interest charged by the lender. You will see the number of days & payments, the dates of each payment and the remaining balance you owe as well.
An amortization schedule is a great tool for borrowers who like to see the progress of their repayment step by step. It can also help you plan around payments and, eventually, the complete repayment of your loan.
The Key Differences Between Amortization Schedules and Payment Schedules
The difference between a payment schedule and an amortization payment schedule is the way they’re broken down and presented to the user. The amortization payment schedule separates payments into the amount you’ll be paying toward interest and how much you’re paying toward the principal, something other payment schedules don’t do.
A basic payment schedule is sometimes preferred because it focuses on your current payment, helping you stay consistent with your payments and build credit in the process.
An amortization schedule, on the other hand, can help you calculate your repayment process by allowing you to see how prepayments might reduce your principal amount more quickly.
What is an Amortization Table and How to Read It
An amortization table is just another name for an amortization schedule and it lists every payment you’ll make during the course of your loan, including how much is going towards interest and principal. Being able to read it will tell you everything you need to know about your progress in repaying your loan – if you know how to read it.
To read an amortization table you’ll start with the “Date” column. This column tells you the date that each payment is due. This date will be easier to keep track of with monthly payments as it will be a reoccurring date. It can get a bit more involved when you’re dealing with weekly or daily payments.
The next column to familiarize yourself with is the “Days” column. This column tells you how many days elapse between payments so you can calculate interest. Because interest is accumulated by calculating the days your loan covers, the long months will accrue more interest between payments.
This column lists the actual loan payment number. This allows you to see how many payments you’ve made to this point and how many payments you have remaining by subtracting the number payment you’re on by the total number of payments.
Interest & Principal
These two columns are the most informative columns on an amortization table. As payments are made, they are split into interest and principal. The “Interest” column records how much of the payment goes towards the interest that was charged on the loan while the “Principal” records how much goes towards the actual amount being borrowed.
The final column of your amortization table is the “Balance” column. This column keeps track of the amount that remains left for you to pay. Your amortization table will have a 0 in its final column to show you have completed your repayment process.
How to Build Your Own Amortization Schedule
Amortization repayment schedules can help you organize and plan out your payments. Having a payment 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 are 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, it’s a great idea to create your own amortization schedule. If you’re ready to take on your own amortization table, take a look at this free Google Sheet for an idea of how to set it up and where the formulas need to be.
The more you know about what an amortization table is and loan payment schedules work, the better prepared you are to make the best financial decisions regarding your business and your future working capital needs.