Amortisation Schedule For Personal Loans: Top Things To Know

Getting a personal loan helps you meet your planned and unexpected financial needs. The exact repayment schedule also helps you track your loan and get a more comprehensive view. This is where the amortisation schedule becomes crucial. Read on to know what it is and the various methods of amortising a loan.

Amortisation Schedule: What is it and How Does it Work?
This schedule is a comprehensive table that specifies your periodic loan payments. The table mentions the interest and principal amount for each payment until your loan is entirely paid off or paid in full.

Simply put, an amortisation schedule provides a detailed repayment plan for your personal loan. Using this chart, you can understand how each monthly instalment helps decrease the loan’s principal component and service the interest dues.

This way, you can assess how and when you will be able to repay your loan. Keep in mind that during the initial phase of repayment, the instalment you pay largely consists of the interest dues.

However, this pattern changes during the latter part of the schedule, with most of the payment covering the principal. The last line you see in an amortisation schedule provides the total interest and principal you owe until the end of the loan tenure.

Most lenders provide amortisation schedules when you use personal loan EMI calculators, helping you understand the repayment plan with ease. Using this table, you can understand the principal and interest components of each EMI payment.

Not only does the schedule help you plan your personal loan repayment effectively, but it also helps you compute your cost of borrowing. Assessing this schedule helps you make informed financial decisions like:
• When to opt for a balance transfer facility
• When to make a part-repayment
• When to plan foreclosure

Here are the six essential columns you can usually find in an amortisation table:
• Month or period
• Opening loan balance
• EMI amount
• Principal amount repaid
• Interest repaid
• Closing loan balance

The period or month is when you pay your monthly instalment. Likewise, the opening loan balance indicates the total debt you owe at the beginning of a particular period. This may be the original loan amount or the balance amount from the previous month.

EMI is the monthly instalment you must pay, which is usually constant throughout the loan duration. The principal and interest repaid refer to the amount you pay over a specific time.
Finally, the closing loan balance indicates the new balance you owe after you have repaid the monthly instalment.

Various Methods to Amortise a Loan
There are several approaches lenders implement when preparing an amortisation schedule. Here are some of them:

Declining Balance
This is an expedited amortisation method in which your interest payment decreases but the principal repayment increases. The repayment of the principal component increases with the tenure of the loan.

Bullet
This approach does not follow the traditional structure, wherein you repay the loan within a specific tenure. Opting for a bullet approach involves periodic payments that include only the loan’s interest.

The final payment at maturity is when you repay the entire principal. Thus, a significant sum remains unpaid throughout the loan duration.

Balloon
This approach is similar to the bullet method, as you repay the entire principal by the end of the personal loan tenure.

However, in a balloon approach, the loan amount is amortised with smaller sums of principal repayment, with the majority being managed at the end of the loan’s term.

Straight Line
This type of amortisation, known as a linear method, involves dividing the total interest amount equally across the loan tenure.

Annuity
This method involves making a series of payments within equal time intervals in equal amounts. In the case of an ordinary annuity, you need to make payments by the end of each period.

However, if it is an annuity due payment, you need to pay at the beginning of each period. Opting for the annuity method ensures you complete loan repayment within a specific duration by paying the interest and principal components simultaneously.

Negative Amortisation
In this approach, the entire personal loan payment period is less than the interest charged for that particular period. Simply put, monthly payments are insufficient to cover the interest accrued during a specific period.

Consequently, the unpaid interest is added to the loan balance, affecting your overall repayment and debt obligation.

Advantages of an Amortisation Schedule for Personal Loans
Here are some key benefits of checking the amortisation table:
• Helps you understand how personal loan repayment works
• Encourages you to adjust the timeline of your loan by considering the cumulative interest payment
• Helps you evaluate various loan options as the table highlights the total cost of borrowing
• Allows you to make an informed decision by enabling you to choose a lending institution offering competitive interest rates
• Aids you in planning when to make additional payments to reduce the principal due and reduce overall costs

As you can see, an amortisation schedule is a valuable financial tool for both the borrower and the lender. Since the table provides a clear view of the repayment structure, it enables you to make the right financial decisions.

Based on this, you may even transfer your existing loan to another lender offering affordable rates. Thus, analysing your amortisation schedule helps you stay on track and save on interest costs.