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Amortization Schedule – Meaning & Steps to Calculate

amortization schedule

There are several charges associated with a loan be it of any kind personal loan, home loan or car loan. Amongst the various charges, the interest rate is the primary component that every loan applicant checks before getting a loan. Even though everyone checks the interest rate charged, there is some calculation involved that determines the significant amount that needs to be paid monthly.

Amortization Meaning

Amortization is a concept that explains the reduction of a debt over the period by making regular payments. The monthly payments will include both the interest rate amount and the principal amount. The percentage of the interest amount keeps getting down towards the end of the tenure. 

Calculate your Personal Loan EMI and check amortization schedule

Amortization Calculation

An amortization schedule refers to the loan schedule with a breakdown of the principal amount clearance that includes the monthly payment to be made, the percentage of interest rate amount in the payment. 

There is a formula to calculate the first-month installment that is

I = P[r(1+r)^n/(((1+r)^n)-1)] 

I = Monthly Installment Amount 

P = Principal Amount

r = Interest rate (per month) 

n = tenure of the loan(in months) 

For example, consider a loan amount of AED 5000 for a tenure of 1 year and an interest rate of 10%(per month) is charged. 

As per the tenure of 1 year i.e. 12 months and 10% interest rate on loan amount AED 5000, 

The interest rate levied monthly would be (10%/12) = 0.00833% of the outstanding loan balance

I = 5000[ 0.0083(1+0.0083)^12/ (((1+0.0083)^12)-1)] = 440 

Therefore the monthly installment would be AED 440, where 0.008% of the outstanding principal amount will be the interest amount and the rest will be reduced from the outstanding principal balance. 

From 2nd month, the percentage of the interest amount in the monthly installment keeps getting decreased and the percentage of loan amount installment increases.  

PeriodMonthly Installment AmountMonthly Interest AmountPrincipal Amount InstallmentOutstanding Loan Balance
1AED 440AED 42AED 398AED 4,602
2AED 440AED 38AED 401AED 4,201
3AED 440AED 35AED 405AED 3,796
4AED 440AED 32AED 408AED 3,388
5AED 440AED 28AED 411AED 2,977
6AED 440AED 25AED 415AED 2,562
7AED 440AED 21AED 418AED 2,144
8AED 440AED 18AED 422AED 1,722
9AED 440AED 14AED 425AED 1,297
10AED 440AED 11AED 429AED 868
11AED 440AED 7AED 432AED 436
12AED 440AED 4AED 436AED 0

By the end of the 12th month, the loan will be cleared. Towards the end, only AED 4 is the interest amount paid. This total schedule/ table of the monthly payments is called an amortization schedule. 

Check: Interest rates on Personal Loan

When the loan holder makes any additional payments other than the monthly installment amount or make a partial payment, it will reduce the share of interest amount in the monthly installment and reduce the tenure of the loan, certainly. In simple terms, the amortization schedule will make the loan holder understand the monthly payments of the loan and get an idea of how much interest amount will be paid totally for the loan taken. 

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