A loan's balance decreases as you pay it off. The interest you owe on it consequently decreases as well. Despite this, many loan repayment schedules have you pay off the debt in equal installments. An amortization schedule analyzes your periodic payments, dividing them into interest payments and repayments on the principal. Over the life of the loan, the portion paying for interest steadily decreases and the portion paying off the principal increases. Loan agreements typically include amortization schedules, but you can also calculate yours on your own.
1. Enter the total amount that you borrow in a financial calculator. For example, if you take out a $20,000 loan, enter "20000."
2. Press your calculator's "PV" button.
3. Type "0" into your calculator, representing the amount you will owe once you have paid off the loan.
4. Press the calculator's "FV" button.
5. Enter the number of periods of the loan into the calculator. For example, if you repay the loan on a monthly schedule and must pay the entire loan off over the course of two years, enter "24," the number of months in two years.
6. Press the calculator's "n" button.
7. Enter your interest rate. For example, if you pay 5.25 percent annual interest on the loan, enter 0.4375, which is 5.25 divided by 12.
8. Press the calculator's "compute" button.
9. Press the calculator's "PMT" button to calculate your monthly payment. With this example, the calculator will display $879.67. This is the size of your monthly payments.
10. Multiply your periodic interest rate by your initial principal. With this example, multiply 0.004375, which is your monthly interest rate expressed as a decimal, by $20,000 to get $87.50. This is the amount of interest that you pay during the first month.
11. Subtract the interest from the previous step from your monthly payment. With this example, subtract $87.50 from $879.67 to get $792.17. This is amount of your principal that you pay off during the first month.
12. Subtract the principal that you pay off from your outstanding balance. With this example, subtract $792.17 from $20,000 to get $19,207.83. This is your balance at the beginning of the second month.
13. Repeat the previous three steps with your new balance. With this example, multiply $19,207.83 by 0.004375 to get $84.03. Subtract $84.03 from $879.67 to get $795.64. Subtract $795.64 from $19,207.83 to get $18,412.19 .
14. Repeat the previous step for all your remaining payments.
Items you will need
- Financial calculator
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