Amortization Schedules

In order to understand what an amortization schedule is, it is first necessary to understand the concept of amortization. When you originally go ahead and sign up for a bank loan, what you are agreeing to do is actually to pay both the amount of the loan itself as well as the interest attached to that loan back to the lender over a certain period of time. Depending on the amount of money you borrow, the annual interest rate, the number of times per year that interest rate is compounded and the overall length of the period during which you pay back the loan, you are going to find that the monthly payment will be a certain amount.

However, while the monthly payment might be a certain amount, the breakdown of that payment will change over time. The payment will always pay down enough interest to keep the interest from expanding in absolute terms before moving on and devoting the rest of the payment to the principal. Because of this method, what you will find ultimately is that the payment breakdown is first slanted very much towards the interest portion of the loan rather than the principal and then over time the percentages change so that you are paying down more of the principal every month because there is less interest to worry about. The process of calculating the appropriate and consistent monthly payment based on changing values of interest and principal amounts is known as amortization.