Definition: The Amortization Schedule is the tabular representation of the periodic payments (principal + interest) made against the loan or mortgage. This schedule clearly differentiates the portion of payment that belongs to the interest amount and the portion that relates to the principal amount and helps to know the principal balance left after each payment.
The term Amortization means, the debts paid over a period of time. Thus, an amortization schedule is prepared to keep a proper record of the payments made periodically against the loan and has a clear picture of the amount given as interest over the loan principal at the end of its term.
Generally, the larger portion of an amount paid initially goes towards interest amount and later as the loan matures and with more and more periodic payments, the larger portion goes towards the payment of the principal amount.
Suppose a loan of Rs 1,00,000 taken for the fixed period of 10 years at a rate of 4.5%, the monthly payment can be calculated by applying the following formula:
A = [i x P x (1+i)n] / [(1+i)n -1]
Where, A = Monthly payment
P= Loan’s initial amount (1,00,000)
i= monthly rate of interest (4.5%/12 = 0.375%)
n= total number of payments (120, if each payment is to be made for every 30 days, so total payments in a year shall be 12 and hence, the payments for 10 years will be 10*12 =120).