Monday, June 29, 2009

What is an amortisation schedule?

Following my two post on the consolidation of debts here and here, I felt the need to talk about the amortisation schedule.

The amortisation schedule is a document that you obtain from your lender. It will give you important information on the payment of your loans. It is similar to the one below. This amortisation schedule is one to repay a debt that has a high interest rate. If you want you can generate your own here or choose any other here.

An amortisation schedule must contain the following information.

1. The principal. That is the amount that has been lent to you and that you need to pay back.

2. The The monthly payment. This is the amount of money that you will pay monthly. This will consist of the the interest payment and the the principal payment.

2. The interest rate on the loan. This will determine the the monthly interest payment, the monthly principal payment and hence your total monthly payment. If you want to learn how to calculate the interest in your loan read this post.

3. The monthly interest payment. This is the interest that you need to paid every month. Most loans use the diminishing balance method. This means that as you pay the loan, the principal on which the monthly interest payment will be calculated will decrease, hence the monthly interest payment will decrease.

4. The principal payment. This is the payment that you do monthly that would result in the reduction of the principal. As you can see initially the principal payment is small. It then increase gradually as the interest decreases.

5. The number of repayments and hence the time that it would take to pay back the loans at the given interest rate and monthly payment. This can change depending on the changes in interest rate or monthly payment.

As I have said in the post ondebt consolidation, knowing how to read an amortisation table have the following advantages:

1.You are able to compare two loans and determine which one is better for you in term of lower interest payment.

2. You are able to tweak your loan and determine what is better for you in term of payment time and monthly payment.

3. You are able to analyse how payment of several different debts is compared to payment of a single monthly sum of money. This way you will find out if debt consolidation is better for you.

I hope that this post have been of help to you. If you have any questions or comment please leave them below.

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