Amortization calculations help you see how a loan is repaid. Each time you make a payment on an amortizing loan, you pay off some principal and some interest. An amortization calculation shows you how much of each is applied to any given payment. Learn how to do amortization calculations so you understand how loans work.
Amortization Calculation Example
Assume you borrow $100,000 at 6% for 30 years to be repaid monthly. How does the amortization calculation work?
Your monthly payment will be $599.55. See Loan Payment Calculations for more details. The numbers will be off just a little due to rounding errors and other technicalities, but you'll get a pretty good picture of how your loan works.
For each $599.55, a portion of the payment will reduce your loan balance and a portion will be your interest cost. To figure out the interest cost, multiply the periodic interest rate by the remaining loan balance. For your first payment, the entire $100,000 is your loan balance, so your interest cost is $500 (or .005 times $100,000).
The amount you pay off (principal repayment) is the difference between your payment and the interest cost: $99.55 ($599.55 - 500).
Finally, reduce your loan balance by the amount of principal you just paid.
A table is the best way to see amortization calculations in action (only the first 3 payments are shown, but you can repeat as needed).
You may notice that your early payments are mostly applied to interest. Over time, more and more of each payment reduces your loan balance.
|Period||Starting Balance||Payment||Periodic Interest||Principal||Remaining Balance|