|
Understanding Amortization Now let's look at the details of an installment loan. Another name for an installment loan is an amortized loan. There are calculators that can figure out the payment schedule for a specific loan, or an amortization schedule. Let's look at a sample amortization schedule for a car loan and one for a mortgage--you can look at the whole schedule by calculating the following data, or just refer to the abbreviated tables below. $5,000 Car Loan
First, let's look at the car loan. With each fixed payment of $103.79, a portion of that—the principal—actually goes to pay down your $5,000 loan and a portion goes to the lender in the form of interest. Notice that the amount of interest that you pay at the beginning of the loan is higher than what you pay at the end of the loan. So, even though your payment is the same, you are actually paying off more of your loan at the end of the term than at the beginning. Loan amount: $5,000
Annual interest rate: 9%
Payment each period: $103.79
Periods per year: 12 (monthly payments)
Total number of years: 5
Total payments: $6227.55
Total interest: $1227.55 Period | Years | Balance | Interest | Principal | | | | | | 1 | 0.083 | $5,000.00 | $37.50 | $66.29 | 2 | 0.167 | $4,933.71 | $37.00 | $66.79 | 3 | 0.250 | $4,866.92 | $36.50 | $67.29 | 59 | 4.917 | $205.42 | $1.54 | $102.25 | 60 | 5 | $103.17 | $0.77 | $103.02 | 61 | 5.083 | $0.15 | $0.00 | $0.15 |
$65,000 Home Loan
Now look at a mortgage amortization, and notice that the amount of interest you are paying in the beginning is even more dramatic. On your first payment, how much are you paying toward the principal of your loan? How much toward interest? Look down to period number 12: after a year of paying your $454.49 each month, how much do you still owe the bank on your $65,000 loan? Loan amount: $65,000
Annual interest rate: 7.5%
Payment each period: $454.49
Periods per year: 12 (monthly payments)
Total number of years: 30 Period | Years | Balance | Interest | Principal | | | | | | 1 | 0.083 | $65,000.00 | $406.25 | $48.24 | 2 | 0.167 | $64,951.76 | $405.95 | $48.54 | 3 | 0.250 | $64,903.22 | $405.65 | $48.84 | 18 | 1.5 | $64,137.60 | $400.86 | $53.63 | 180 | 15 | $49,174.29 | $307.34 | $147.15 | 358 | 29.833 | $1,345.79 | $8.41 | $446.08 | 359 | 29.917 | $899.71 | $5.62 | $448.87 | 360 | 30 | $450.84 | $2.82 | $451.67 |
Equity
As you pay back the principal of your loan, you build equity. Equity is the portion of your asset that you own. You can see that your equity is built very slowly over the first few years of owning a home or some other asset. As you near the end of the term of your loan, you will be paying an increasing portion toward the principal and thus building more equity. [ Next ] Pre-Paying
|
Affordable Housing 
Maine Legislature Passes Model Anti-Predatory Lending Bill.