All you need to know about meaning and how to calculate amortization?
If you dream of being a homeowner, you may have considered taking a loan at an affordable interest rate and with a convenient repayment mode. This financial situation may have led you to research and search for countless lenders. At this stage, it is important to understand all aspects related to amortization. If you are going through this process, this article explains amortization, how to use a loan amortization calculator and the importance of understanding these details when it comes to your loan repayments.
What Is Amortization
Amortization is a widely used term in the world of banking and finance. It is an accounting method used in the course of loan repayments. Amortization is explained as a process in which the loan is paid off in regular instalments until it is fully repaid by its maturity date. Purchasing a home, buying a car, or studying abroad are some large expenses. These expenses require lump sum payments upfront. But for those who do not have access to finances, a loan is a great option. The loan that is taken is spread out in equal portions to be repaid over a time period that includes the money borrowed and the interest.
What Is An Amortization Calculator
The loan that you take needs to be repaid in regular instalments until the loan debt is fully repaid. An amortization calculator is a tool that helps to estimate the periodic instalment due on a loan based on a standard formula. An amortization calculator helps assess and spread the loan amount in equal portions over a period without burdening the borrower and preventing the lender from losing any money.
What Is An Amortization Schedule
An amortization schedule is a chart that details or breaks down the loan amount into instalments. It also includes the interest that needs to be paid over the full term generated by the amortization calculator. An amortization schedule details the principal balance, the interest charged to the borrower, and the remaining amount to be paid. This gives the borrowers an idea of how much they have to repay.
The Parameters Of An Amortization Schedule
There are three parameters that an amortization schedule depends on for the fair division of loan amount. These are:
- The loan amount
- The tenure of the loan amount
- The interest rate
How Is Amortization Calculated
Amortization is calculated following a standard formula that is used by financial institutions when lending money to their borrowers. The formula for amortization calculation is as follows:
A= P i (1+i)^n / (1+i)^n-1
Where:
A = periodic payment amount
P = principal amount
n = total number of payments
i = periodic interest rate
The formula above stands true only for yearly calculations. While calculating monthly payments, the periodic interest rate (i) should be taken as i/12. Several amortization calculators that are available online follow the formula above to arrive at the result.
What Loans Come Under Amortized Loans?
Most types of loans come under amortized loans, including vehicle, student, personal and mortgage loans. These are calculated based on a mortgage amortization calculator. The borrower clears the outstanding balance by paying off a series of payments. This includes a portion of the loan amount and a certain percentage of interest.
How Does Loan Amortization Work?
If you have made up your mind to take a loan for your financial commitments, you might be thinking about how the amortization process will take place.
Suppose you have taken a loan of Rs. 30,00,000 for a tenure of 25 years at 5% interest per annum. Here, you will be required to pay around Rs. 17,567 a month, approximately. The principal amount of Rs. 30,00,000 will amount to Rs. 52,00,000 in total by the end of the term, which includes the interest of Rs. 22,00,000 as well. This means the regular payment of Rs.17,567 a month for the next 25 years will clear your debts.
It is important to note that the above calculation may not stand true with every financial institution.
Benefits Of Amortization Loans
Years before the mortgage amortization calculator was devised, people had to pay a large chunk of money to buy homes or personal vehicles. Even if they took a loan, they had to pay half of the amount of it, and another half was to be paid in a span of 5 to 7 years.
The emergence of financial institutions following loan amortization calculators to disburse loans has brought great relief to many people. Loan amortization is a great way to track the portions of the loan amount that needs to be repaid. It helps the borrower make informed decisions about the financial institution from which they want to take the loan and understand the payment breakdown.
Amortization of a loan with the help of a loan amortization calculator benefits the borrower. It helps them understand how the loan works and shows them the different parts of the loan. It offers a clear setup of the monthly payment without confusing the borrower. Calculating the different aspects in advance helps borrowers make an informed decision about taking loans. It also helps them plan their expenditure and other payments better. Furthermore, it prevents them from making payments earlier or even making any extra payments toward the loan amount.
Conclusion
Taking loans has become common nowadays, as they help us make big purchases, which otherwise may not be possible. For getting loans, it is essential to understand how they work and what are the drawbacks of it, if any. A loan amortization calculator calculates the exact figures, and the schedule provides the proper breakdown of repayment of the loan amount. For more information on amortized loans and mortgage amortization calculators, visit Piramal Finance, for more helpful articles on making informed decisions regarding loans.