Have you taken a loan recently and are unable to keep a track of the repayments due? It may feel intimidating to have such a heavy load on your shoulders. If you are a first-time borrower, you may feel sceptical about how you will be able to meet all the payments on time. You may also feel scared about missing a payment and having to pay a penalty for it.
Well, your problem can be solved with the help of two different things. An amortization schedule can help you with it if you have an amortized loan or you can take the help of a repayment schedule.
These two things will help you understand the amount you owe for a certain time beforehand. They will also assist you in planning how to plan the repayments along with the other financial obligations that you have. You can also understand how much you are paying as interest and how much is the principal repayment component. This will help you with things like prepayment benefits.
Concept Of Amortization Schedule
As your loan term keeps decreasing, you find the respective details in an amortization schedule. These details will be the loan amount, the loan amount balances after every payment you make, the amortization period, the loan tenure and the breakup of the total repayment amount into the principal component and interest component.
An amortizing loan can also be called a reducing loan as the balance keeps reducing until it reaches zero and all the outstanding amount is repaid.
Amortised Loans And Non-Amortised Loans
The loans you take can be divided into two parts: Amortised and Non-Amortised. They both are different from each other in certain aspects. This is a major determinant when you want to know the difference between repayment schedules and amortization tables.
The interest applicable on a non-amortizing loan does not compound and stays fixed at a certain sum of money. However, this is not the case when we come to an amortizing loan.
Amortizing loans comes with the benefit of paying the loan on time. This implies that you can prepay your amortized loan and save yourself from future interest payments. When it comes to non-amortizing loans, you will have to keep repaying the loan till the end of the loan tenure. You will be unable to prepay your loan or will have to pay a prepayment penalty in case your lender allows you to repay the loan.
A few examples of amortized loans are car loans, student loans, personal loans and home loans. A few examples of unamortized loans are credit cards, interest-only loans and loans that have a balloon payment like a mortgage.
What Is An Amortization Table?
An amortization table consists of all the repayments due by you on your loan. It divides them into the principal and the interest portion. The components of this table are given below:
- They take the loan details like the loan amount, loan tenure and interest rate under consideration.
- The payment is considered for any calculations made by the amortization calculator.
- There is another column that keeps a track of the total monthly payments that you will be making toward your loan.
- If you have made any payment that is less than the actual monthly payment supposed to be made by you, the table will adjust it with the future payments and show the updated loan balance.
- This column is for understanding how much of the total amount goes towards the principal repayments.
- Like the previous column, there is another column that is dedicated to showing the interest payments that you are making on your loan.
- The last column would be the one that shows the outstanding balance as and when you make the monthly payments due.
This amortization table can help you with a few things that are given below:
- You can calculate the amount you will save in the form of interest if you make surplus payments in advance.
- You can use it before taking a loan to understand your financial standing and how much is affordable based on that.
- Interest payable on several loans like home loans are tax deductible. So you can use this table to understand how much benefit you can avail from it.
Key Difference Between Amortization (Table) And Repayment Schedule
We have discussed the amortization table in detail above. A repayment schedule is nothing but the same with a few columns eliminated.
A repayment schedule is a table that includes all the payments that you have to make during the loan tenure. It includes the date of payments and the amount to be paid on the respective dates.
Let us understand the difference between the two in a better way:
- Amortised tables are only available for amortized loans. For unamortized loans, you will have to refer to a repayment schedule.
- The amortization table breaks down the interest and the principal component. However, a repayment schedule will not give you such concrete details. This makes an amortization table a lot more transparent than a repayment schedule.
They are both useful. However, if you are running a small business and want to know your detailed expenses, it may be better to opt for an amortized loan.
Depending on the details that you want of your loan repayments, you can choose the type of loan as it decides the type of schedule you get. However, experts tend to believe that an amortization table is more helpful for businesses and individuals. This helps to keep a track of what they are spending monthly on interest payments and principal repayments. If you wish to prepay your loan, an amortization table will be more helpful in that case. This is because it will help you determine the interest savings that you could make.
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