how to calculate loan amortization
the formula to calculate the monthly principal due on an amortized loan is as follows principal payment tmp olb interest rate 12 months where tmp total monthly payment olb outstanding loan balance begin aligned text principal payment text tmp big text olb times frac text interest rate text 12 months big textbf where text tmp text total monthly payment text olb text outstanding loan balance end aligned principal payment tmp olb 12 monthsinterest rate where tmp total monthly paymentolb outstanding loan balance typically the total monthly payment is specified when you take out a loan however if you are attempting to estimate or compare monthly payments based on a given set of factors such as loan amount and interest rate then you may need to calculate the monthly payment as well if you need to calculate the total monthly payment for any reason the formula is as follows total payment loan amount i 1 i n 1 i n 1 where i monthly interest payment n number of payments begin aligned text total payment text loan amount times bigg frac i times 1 i n 1 i n 1 bigg textbf where i text monthly interest payment n text number of payments end aligned total payment loan amount 1 i n 1i 1 i n where i monthly interest paymentn number of payments you ll need to divide your annual interest rate by 12 for example if your annual interest rate is 3 then your monthly interest rate will be 0 25 0 03 annual interest rate 12 months you ll also multiply the number of years in your loan term by 12 for example a four year car loan would have 48 payments four years 12 months amortization schedules usually have six columns each communicating information to the borrower and lender the six columns are often laid out as shown below pros and cons of loan amortizationamortized loans feature a level payment over their lives which helps individuals budget their cash flows over the long term amortized loans are also beneficial in that there is always a principal component in each payment so that the outstanding balance of the loan is reduced incrementally over time the main drawback of amortized loans is that relatively little principal is paid off in the early stages of the loan with most of each payment going toward interest this means that for a mortgage for example very little equity is being built up early on which is unhelpful if you want to sell a home after just a few years amortization of intangible assetsamortization can also refer to the amortization of intangibles in this case amortization is the process of expensing the cost of an intangible asset over the projected life of the asset it measures the consumption of the value of an intangible asset such as goodwill a patent a trademark or copyright amortization is calculated in a similar manner to depreciation which is used for tangible assets such as equipment buildings vehicles and other assets subject to physical wear and tear and depletion which is used for natural resources 