What is loan amortisation?
Amortising a loan means paying it down over time through regular payments.
How a loan amortisation schedule works:
A loan amortisation schedule is a table detailing each periodic payment on an amortising loan. A portion of each payment is for interest while the remaining amount goes towards the principal balance.
The exact amount applied to the principal amount varies each time. The “principal” is the initial amount of the debt, while the “interest” is the amount you pay for the use of someone else’s money. It is expressed as a percentage.
Initially, a large portion of each payment is devoted to interest. As the loan matures, larger portions go towards paying down the principal.
If the loan is a fixed-rate loan, each fully amortising payment will be equal in amount.
A loan amortisation schedule is used to show exactly how the payment structure of a loan works. It breaks the loan down into easy monthly payment schedules.
An example of loan amortisation is a mortgage. Once you have been approved for a mortgage and as you pay off the loan amount each month, the interest portion is cleared first. Over time, the principal amount is paid off.
The word “amortizing” has its roots in the French term “amortir” which refers to the act of providing death to something. Amortization is therefore the elimination of a debt over time with periodic payments.
Loans can be fully or partially amortised.
Fully amortized loans:
With these loans, when you pay the instalment the debt balance is reduced and the interest due on the next payment is recalculated based on the new (reduced) loan principal balance.
Partially amortized loans:
These loans are partially amortized when instalments are not enough to repay the initial loan principal by the end of the term.