Loan Amortization

How to Calculate a Loan Amortization

Any financial institution employs a special method in paying off a loan that generates the process of paying a certain equal installments on a regular basis which is in most cases on a monthly basis over an extended period of time. Amortization includes the interest rate for the period of time as well as the amount used to deduct the total principal balance and the remaining of the principal balance. This process is repeated and continues to deduct whatever amount is paid until the maturity date of the loan is completed.

Let us say you opt to use the fixed rate loans or mortgages, say for example you are going to lend an amount of $100, 000 to be paid within 15 years, which will translate to 180 months with a fixed rate loan of 7%. Then, you will need to pay $898.83 per month, for 180 months. At times, there might be a slight difference on the last installment payment period because of the rounding of the entire amounts already paid for the previous installment payments. Normally, the first payment will have a huge portion for the interest rate and a lesser portion to the principal balance. But as the installment periods precede, the principal balance gets the higher amount while the interest rate gets the lesser portion of the installment payment.

However, if you decide to apply for a fixed interest rate of like 6% for the same amount, which is $100,000 to be paid within 30 years, you will then need to pay $599.55 every month for the 360 month period. This type of process is what is referred to as full amortization term. But if you will pay a monthly amount of $1,110.21 every month this will reduce the period of installment payments to 120 months cutting the number of years to about 10 years. As a result, you are be able to pay off your entire loan within 10 years instead of 30 years.

In the US, the fixed terms of installment payment used is the 15 to 30 year time frame. If you aren’t really into this kind of computation you can always seek assistance to any financial consultant who will discuss and explain to you thoroughly the whole process. Basically, you will be given already a table which is a detailed computation of your interest rate, amount to deduct for the principal balance and the remaining of the total amount of your loan for that certain installment period. This moves to the next payment due date until the installment period is finished. 

The financial advisors or consultants should be able to discuss with you in detail on the ways to be employed to ensure that the loan is fully paid within a stipulated period. You should be provided with different variations of payment methods. It is advisable that incase of any confusion, you need to feel free to ask questions rather than keep some things to yourself. Seek professional opinion on your financial concerns lest you end up paying for what you shouldn’t be paying in the first place.

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