An amortization schedule is a detailed table presenting periodic interest and principal payments of a loan. This table helps to calculate the exact amount of money to be paid at several intervals over time. The main features of the schedule include a breakdown of each payment into interest and principal. The principal part of each payment increases every interval, and the interest portion decreases. The schedule clearly displays the ongoing loan amount or balance.
1. How is an amortization schedule beneficial?
An amortization schedule offers a clear view of how much you’re paying towards the principal and the interest each period. It reveals the timeframe towards complete loan repayment and is a great tool for financial planning and budgeting.
2. What do you mean by loan principal?
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The loan principal refers to the amount of money you initially borrowed. The principal reduces with each payment made, as a part of your payment goes towards reducing the initial loan amount.
3. Can an amortization schedule change over time?
Yes, an amortization schedule can change over time. This may happen due to changes in interest rates in the case of variable rate loans, or if you make extra payments towards the principal amount.
4. What is the difference between amortization and depreciation?
While both amortization and depreciation spread the cost of an asset over its useful life, the main difference lies in the type of asset involved. Depreciation is used for tangible assets like machinery or vehicles, while amortization is used for intangible assets like patents or copyrights.
5. What is an example of an amortization schedule?
An example of an amortization schedule is a homeloan repayment plan. Here the monthly repayments are split into principal and interest components and clearly laid out for the entire loan term. This allows a borrower to see exactly how much they are paying off the loan principal and how much is going towards interest each month.