An amortization table is a table showing the payment schedule (principal and interest) that must be faced when a loan is granted .
That is, the repayment schedule is a summary of all the payments that the borrower (the person who enjoys the loan) has to make during the life of the loan. For example, in the table will be how much we will have to pay interest, repayment of the principal and what is the outstanding debt in each period.
In this way, we can know how much we will pay, for example, month 10 or the third month of year 3.
Components of a depreciation table
The amortization table is usually made up of five columns:
- Period:It is usually found in the first column. That is, each period refers to the time at which the payment has to be made.
- Interest: It is in the second column. Here are the interests that the borrower pays the lender in each period. It is calculated by multiplying the interest rate agreed by the outstanding capital (which, as we will see, is the fifth column). The interest can be fixed or variable.
- Amortization of capital:It is usually in the third column. The repayment consists of the repayment of the loan, without counting the interest. That is, it is what is deducted each period of outstanding capital.
- Fee to pay:It is in the fourth column. It is the sum of interest and amortization.
- Loan capital pending repayment:It is in the fifth column. To calculate it, the outstanding capital of the previous period and the amortization of the current period are subtracted in each period.
However, the order previously established by columns may change. The important thing is to be clear about the concepts.
Below, we can see a graphic example of amortization table:
Types of amortization
The loan repayment can be done in various ways. The most important are the following:
- Through constant capital amortization(the third column, as in the graphic example). The fee to be paid each time is smaller, since the interests are smaller as time passes. It is also known as the French method or progressive (quota) method. If you indicate that you provide us with a French amortization schedule, it has been carried out with this method.
- Through constant quotas(the fourth column). In this case, the fee to be paid is always the same, while the loan repayment is lower at the beginning and higher at the end. It is the most common method for paying fixed rate mortgages .
- Through a single repayment, at the end of the loan or American method. In this case, only interest is paid during the life of the loan and, at the end of the loan, the entire amount of the borrowed capital is paid. For example, it is used for repayment of interest and principal of bonds.
Implications of a depreciation table
An amortization table may have different implications, depending on its interest rate:
- If the interest rate is fixed: The repayment schedule is real and definitive from the first moment. That is, the payment schedule established in the granting of the loan is the one that will be applied.
- If the interest rate is variable:The amortization table is a simulation. That is, it is a forecast of payments, but it is not the definitive payment schedule, since interest rates will change over time.
The financial institutions are required to provide this information to the client. In the case of a fixed interest rate loan, requesting the table at the beginning of the loan is sufficient, since this does not change. However, if the interest rate is variable, the repayment schedule will vary, so it is best to request it periodically.
Other uses of the ‘amortization table’ concept
The repayment schedule usually refers to the payment or “repayment” of the loans, as we have defined above.
However, this concept can be used for any type of amortization. In particular, companies often use them to establish the depreciation of their fixed assets and determine the useful life of those elements.