Your financial decisions can be made easier with an amortization schedule.
- An amortization schedule shows the actual cost of a loan.
- An amortization chart can take the emotion out of a buying decision.
- Savvy borrowers rely on amortization schedules to make the decision that’s best for them.
Amortization schedules can (literally) be the most boring subject anyone will discuss with you this year. Stocks are exciting, startups are sexy. Amortization schedules are, well, amortization schedules. So why are we raising them? We want you to know that understanding an amortization schedule can take you from “average borrower” to “genius borrower.” Here’s how.
What is an amortization schedule?
Stay with us here. If you fall asleep at this point in the article, you will miss all the good stuff.
When you take out a loan, part of each payment is used to pay the principal and part is used to pay the interest. Think of it this way. If you took out a $10,000 interest-free loan with a repayment term of 60 months, you would know exactly how much of your payment was to pay off the principal of the loan. As long as you made a payment of $167 per month, the principal would decrease by $167 and the loan would be paid off in full in 60 months.
But what if you have an interest rate of 7.25%? From the top of your head, would you be able to figure out how much of your monthly payment goes to principal and how much to interest? If so, you are a bit rare.
Most of us rely on an amortization schedule to determine precisely how much of each payment goes toward paying off the loan. It looks like a simple chart, but it can be a powerful decision support tool.
1. You become a borrower and understand the real cost of a loan
Let’s say you’re on a pretty tight budget, but your dream car costs $60,000. You realize that’s more than you should be spending, but if you extend the term of the loan to 10 years, the monthly payment seems to be manageable. Yes, you believe it, you can afford to pay a APR 6% and a monthly payment of $667.
And that’s where an amortization schedule comes in (and why you’ll soon consider it your best friend).
An amortization plan is like that friend who tells you that you have lettuce stuck between your two front teeth or your fly is down. It’s brutally honest.
An amortization schedule shows more than just how much of your monthly payment will be used to repay your principal. If you scroll down the page, you’ll also see exactly how much interest you’ll pay over the life of the loan. In the case of your $60,000 dream vehicle, it’s just under $20,000.
And, like a good friend, an amortization plan gives you a gentle slap in the back of the head while encouraging you to rethink your strategy.
If you really want this vehicle, you have a few decent options:
- Wait until you pay more bills or make more money and take out a five-year loan instead. Your monthly payment will be $1,160, but you’ll pay $9,600 in interest instead of $20,000. That’s over an extra $11,000 to save or invest in your future.
- Wait until you have saved a fair down payment. Let’s say you’re slowly putting aside enough to make a $10,000 down payment on your dream ride. That would bring your monthly payment down to $967 for five years, and you’d pay a total of $8,000 in interest.
3. You become a smart borrower
Salespeople have a job to do. A real estate agent wants you to buy a house and a car salesman wants to sell you a vehicle. There’s no shame in that. However, when someone tries to say, “Hey! We could extend the term of the loan and reduce your repayments,” you have an amortization schedule to provide you with the real scoop.
It’s your life and your money. You decide whether or not to keep money in your Bank account or spend it. You decide whether or not a loan is right for you right now. And an amortization table is there to help you make the right decision.
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