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Published bySavana Colley Modified about 1 year ago

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Building an Amortization Schedule How the banks do it and what we need to know…

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What is an Amortization Schedule? Answer: An Amortization Schedule is a payment schedule calculated from our monthly payments that shows: Interest accrued for that payment Principle deducted for that payment Principle remaining. Amortization Schedules allow to examine a loan in depth and determine whether we can afford such a liability.

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How do I build an Amortization Schedule? 1 st – Gather all of the details about our loan. Ex) I borrow $300 at 10% interest compounded quarterly for 1 year. What I know: P = 300 r =.10 n = 4 (quarterly) t = 1 2 nd – I calculate my monthly payment

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Now for the Schedule: 3 rd - Create a table to help calculate/organize my values: Payment #Monthly payment Interest paid this term Amt. paid on the principle Balance Unpaid 1 Calculated In step 2 $79.75 - - 2 Unpaid Balance from row 1 used here Unpaid Balance from row 1 used here 3$79.75Unpaid Balance from row 2 used here 4$79.75

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Let’s examine Row 1 Row 1 Payment #Monthly payment Interest Paid this term Amount paid on balance Balance Unpaid 1$79.75 Calculated In step 2 as $79.75 --

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Now, Let’s Examine Row 2 Row 2 Payment #Monthly payment Interest Paid this term Amount paid on balance Balance Unpaid 1$79.75300 * 0.025 = $7.50 $79.75 - $7.50 = $ 72.25 $300 - $72.25 = $ 227.75 2$79.75 Calculated In step 2 as $79.75 -- Note the unpaid balance for Row 2 is from Row 1!!

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Continuing in this manner creates the following table: Payment #Monthly payment Interest paid this term Amt. paid on the principle Balance Unpaid 1 $79.75 300 * 0.025 = $7.50 $79.75 - $7.50 = $ 72.25 $300 - $72.25 = $ 227.75 2$79.75227.75 * 0.025 = $5.69 $79.75 - $5.69 = $ 74.06 $227.75 - $74.06 = $ 153.69 3$79.75153.69 * 0.025 = $3.84 $79.75 - $ 3.84 = $ 75.91 $153.69 - $75.91 = $ 77.78 4$79.7277.78 * 0.025 = $1.94 $79.72 - $1.94 = $ 77.78 $77.78 - $77.78 = $0 Note the difference in the last payment. This is due to rounding throughout the schedule. Last Payment = Balance Unpaid + (Interest paid this term)

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