Amoritzation tables are used to show the progress of a loan. Amortization tables are most often associated with mortgages. Being able to read an amortization table will help you to understand the amount of your payment the goes towards paying down the principal of the loan and the amount that goes towards paying the interest that accrues on the account.
Read the monthly payment column, which shows the amount due each month. This column shows the amount that you pay. With most loans, the monthly payment remains constant over the life of the loan.
Read the principal paid column, which represents the amount of the monthly payment that goes towards paying down what you owe. Early in the loan, this amount will be much smaller because more interest accrues. However, as the outstanding balance of the loan decreases, more of each monthly payment will go towards paying down the loan. You can calculate the amount of each payment that goes towards principal by subtracting the accrued interest from the monthly payment.
Read the interest column, which represents how much of your monthly payment goes towards paying off accrued interest. Early in the loan, this amount will be much greater because the most of the original loan has yet to be paid back. However, as the balance gets paid down, less of the monthly payment will go towards interest payments. You can determine how much of your monthly payment goes towards interest by multiplying the monthly interest rate by the outstanding balance of the loan.
Read the balance column, which shows how much you still owe of the original balance. You can determine how much of the loan is still outstanding by subtracting the portion of the monthly payment that went to principal, from step 2, from the previous outstanding balance.
Tips & Warnings
- Some loans allow the monthly payment to be less than the interest that accrued during the month. This results in negative amortization, which means the outstanding balance will increase instead of decrease.
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