Anyone who’s looked into any type of loan with an installment agreement is no doubt familiar with an amortization schedule, or at least heard the terminology used before. If you aren’t familiar with it, or if you aren’t exactly sure of the amortization definition, here’s a quick primer. Amortization is a form of accounting that allows you to pay off a loan over a given period. If you’ve ever had or looked into starting an installment agreement, the payment schedule was based on amortization. The most common loan agreements that use amortization are auto loans, mortgages, and personal loans. Each will vary in the length of its terms, but any loan with a maturity date and set monthly payments utilizes an amortization schedule. There are uses for amortization outside of loans, and those generally include intangibles such as cost versus revenue of certain assets. That process factors in cost over time and is most useful for taxes and recording of expenses. For the sake of this article, we’ll limit the discussion to installment agreements for loans.
How does amortization work?
Amortization is the technique used to calculate a loan payment schedule with a set payoff date, or maturity, for the debt. Most asset-based loans use this method of calculation, and in its simplest terms, amortization has three main components:
- Total loan amount
- Interest rate
- Total term length in months
With amortization, the monthly payment figure is based on the total loan amount (including interest) and the maturity date. From there, you end up with a set amount of money due each month for the full term length.
The breakdown of what percentage of each payment goes to interest versus principal changes each month, but the total amount paid is the same right up to the final payment. The only time this would change is when additional payments are made during the loan term.
The interest portion of each payment is essentially what the lender earns or receives as their payment for the loan, while the principal portion is deducted from the actual loan amount. Figuring out an amortization schedule for yourself sounds more complicated than it is.
You take your starting loan balance, subtract the first month’s payment amount, then deduct that month’s interest portion from the monthly payment to know how much principal was paid. You then deduct the principal from the new total balance, and then you’d calculate again for the next month.
Luckily, there are online amortization calculators, and many spreadsheets have simple amortization forms that save a lot of time.
What is an amortization calculator?
Whether it’s online or something from spreadsheet software, an amortization calculator isn’t required for you as a borrower. It’s still a good idea as a borrower to not only see how borrowing works but to also know exactly where your money is going.
By running some calculations on an amortization calculator, you’ll be able to see what portion of your monthly payment goes to interest at the beginning of your term vs the end. You should be able to notice a difference. This also shows you how much of a difference a lower interest rate can make and you can figure out how beneficial it would be to pay off the loan early and skip some of the interest payments.
What is an amortization period?
An amortization period is simply the length of your loan term. If an amortization period for a loan is 12 months, the installment agreement would be for 12 equal payments each month for a whole year.
Amortization periods can vary greatly. Car loans, for instance, generally fall in the 3-5 year range, and mortgages are often financed over 15- and 30-year periods.
Use an amortization table to learn more about what portion of your loan payments are going to interest versus principal. The more knowledge you have of the loan process and how borrowing works, the better prepared you’ll be.
If you decide that the speed and convenience of an online personal loan are what you need, take a few minutes and fill out a personal loan application with Helix. The application process is quick and easy and you’ll have a decision within seconds of applying. Receive your funds as soon as the next business day, and either make scheduled payments for the full term or pay off your loan early and save.
Can I get a personal loan with a 550 credit score
At Helix, we believe non-prime (or “sub-prime”) borrowers should still have access to personal loans. Even if your credit score is below 670, Helix can provide personal loans to those with bad credit up to $4,000. To see if you qualify for what you’re needing to borrow at this time, submit an online personal loan application and see if you are approved within minutes.