- Amortizing means to pay off gradually. An amortizing loan is any loan that is paid off over a set amount of time. The payments are broken into periods of time or increments that are typically monthly payments. Added to these monthly payments are smaller amounts called interest. The interest is the cost of borrowing the money and is calculated by using an agreed upon interest rate.
- Amortization tables are also called amortization schedules. These tables define the payments to be made on an amortization loan. They show the parts of each payment (principal and interest), how many payments are to be made, the beginning principal owed and the outstanding balance at any point before and after a payment is made.
- Before a final amortization table can be created, all of the terms of the loan must be agreed upon. For example, a borrower requests a loan amount of $10,000 (amount of the loan). The lender agrees, if the borrower agrees to pay it off over five years (term of the loan) and also pay an additional 5 percent (interest rate of the loan). Most lenders use an amortization calculator to figure the table using these three numbers.
- Amortization schedules look like spreadsheets and are created in five columns. The first column is Number of Payments; then Outstanding Balance; then Payment Amount; then Interest Paid and finally, Principal Paid. In our example, there would be 60 (five years of 12 monthly payments equals 60) rows numbered 1 through 60 (1 being the first payment and 60 the last). Formats can vary but all will indicate the number of payments, the amount of principal paid and the amount of interest paid.
- Amortization schedules follow chronological order and begin with the first payment. First payments must be made a month after the initiation of the loan. The final payment may be a different amount than previous payments.
