How to Calculate Amortization
Amortization is the process used in calculating the payout of a loan over its lifespan. All loans can be amortized, including auto and personal loans, as well as mortgages. The process involves calculating each monthly payment for the life of the loan taking into consideration the principal balance and the interest rate.
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Instructions
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Determine the principal balance of the loan. This is the total amount of money that you will borrow.
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Calculate your monthly payment. This is usually determined with a financial calculator (see Resources). You need your interest rate, principal balance and the length of the loan term to determine this value. For example, a $10,000 loan at 5 percent interest rate for 10 years, will have a monthly payment of $106.07.
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Determine your monthly interest payment. Initially more of your payment will go toward interest and less toward principal and vice versa until the loan is paid off. Using our current example, the interest payment for the first month will be $41.67 ($10,000 x 5 percent / 12 months).
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Prepare an amortization schedule based on the calculations above. In the first month nearly $42 of the $106 monthly payment will go toward interest and the rest toward principal. The principal balance in the second month will be slightly reduced and this continues until the loan is paid off in the 120th month.
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Use an online calculator. There are many online calculators that can automatically perform the above computations. There are also spreadsheet versions you can download for free and save on your computer for future use. See the links in Resources below.
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