# What is an Amortization Schedule?

Definition: The amortization schedule refers to the allocation of loan payments over interest and principal for a determined period of time until a loan is paid off.

## What Does Amortization Schedule Mean?

What is the definition of amortization schedule? This schedule is a very common way to break down the loan amount in the interest and the principal. Most people think that by making a minimum payment for their loan, they lower the principal amount. This depends on the duration of the loan.

For example, in the beginning of the term for a long-term loan, most of the payment goes towards lowering the interest. As the term progresses, a greater percentage of the payment goes to the principal and a lower percentage goes to the interest. So, people who want to pay off their loan fast, make extra payments in the beginning of the term.

Let’s look at an example.

## Example

John wants to buy a new car. The cost of the car is \$21,000, but John cannot afford to buy the car in cash. So, he needs to apply for a loan. The loan officer at the bank offers him an amortization schedule for the loan repayment. The deal includes the repayment of \$21,000 in 11 years at an annual interest rate of 7%. This generates a monthly payment of \$2,800, out of which \$1,470 goes towards interest and \$1,330 towards principal.

So, here is the loan schedule with regular payments as well as the allocation of payments on interest and principal:

If John makes an extra payment of \$500 in year 2, \$1,000 in year 5, and \$800 in year 7, then he will be able to repay the loan in 10 years. Notice that in years 2, 5 and 7 that he makes the extra payments, the allocation of payment towards the interest is less than the allocation of payment towards the principal.

## Summary Definition

Define Amortization Schedules: Amortization schedule means a table showing a detailed listing of a loan’s balance as interest and principal payments are made.

error: Content is protected !!