How To Plan A Loan Repayment Schedule

2019/10/03

The schedule of loan repayment, usually called amortization schedule, displays the detailed record of payments made periodically against a loan or mortgage.

It shows the complete history of payments made – date of payment, serial number of installment, amount paid with breakup of money paid towards principal and interest, balance to be paid and the future plan of payments to be made. It also makes you understand the liability pending with you, with regards to the mortgage.

Features of Loan Repayment Schedule

The payment remains same till the end of the period of repayment, for a fully amortized mortgage on fixed interest rate. Every installment paid by you includes interest on the balance amount and a part of principal amount. The contribution towards the principal amount is small initially, but will increase over the subsequent installments.

Thus, with every installment paid, the amount of balance principal decreases, along with a decrease in the amount paid towards interest. The fractional increase in the principal amount covered in every installment, will continue till the end of the term. Thus over time you will be able to reduce the principal amount without any additional burden on your monthly family budget.

In case of refinancing a loan any further, it may affect the schedule of amortization with fresh terms and rates of interest. One can finish off the sequence of installments by making more payments as the interest part decreases and principal part increases with every subsequent installment. A lower payment may give you relief for some time but you will have to pay more interest for stretching the loan for a longer period.

There are a number of schedules of amortization, one for each type of loan. A home mortgage for 30 years may be dealt with the schedule of straight line amortization whereas the negative amortization loan may use the table of increasing balance. Other type of loans may be follow amortization of decreasing balance, annuity or bullet options.

Illustration

It can be understood in a better way with the aid of an example. Suppose a borrower takes a loan for $10,000 from a lender at a rate of interest of 12% on 15th of June. If the monthly installment, payable from 15th of July, is settled to be paid for $350, it will include $100 against the interest of one month @ 12% annually and $250 will be adjusted in the principal amount.

Now the principal amount for the month starting on 15th of July will remain $9,750. Now calculating interest for the next installment, the amount will be $97.50 and the balance of installment i.e. $252.50 will be adjusted from the balance principal amount of $9,750, leaving the balance to be $9,497.50 for the next month.

Thus we see that the interest on the balance amount of principal is calculated and deducted from the installment at first and the remaining amount is adjusted from the balance principal to get the remaining balance of principal for the next month.

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