What is Amortization?
Amortization is the process of writing off or paying off the expenses of an intangible asset over a period of time. It is similar to depreciation in its process, except that amortization is only for intangible assets such as trademarks, patents, licenses, etc., while depreciation is for tangible and fixed assets such as machinery, equipment, factories, land, buildings, etc.
But it is not restricted to just intangible assets. Amortization can occur for liabilities as well. In lending terms, it is a way of spreading out the payments that you need to make when making a large purchase, such as a house. Similar to assets that depreciate in value, liabilities such as loans and repayments also depreciate in value. These are known as amortized loans.
In an amortized loan, the EMI you pay is divided between a principal amount and interest that you pay each month as your amortization table. The repayment starts off with paying higher amounts of interest and smaller principal amounts. Over the years, as you progress further down your repayment period, the interest you pay starts decreasing as compared to the principal amount.
What is an Amortization Schedule?
An amortization table or schedule is basically a chart that details the amount you must pay over the period of the loan you have taken to buy a house. It includes the total value of the loan taken, the monthly EMI that you have to pay, and the breakup of that monthly instalment into a principal and interest amount.
To understand this better, let’s take a look at an example. Let’s say you have taken a home loan of Rs. 50 lakhs for a period of 20 years with an interest rate of 7%. Here’s how the first 10 months of repayments will look for you:
As you can see from the table above, the principal amount in the first month is less as compared to the 10th month, and the interest amount is more in the first month as compared to the 10th month. As you progress to years 5 and 10, the principal amount will have overtaken the amount to be paid as compared to the interest.
This happens because over a period of time the value of the loan starts amortizing. This amortization table gives you a clear understanding of how much you will be paying every month for the duration of your repayment. You can use any amortized loan calculator online to give you an accurate breakdown by entering your loan amount, the interest rate, and the duration of your repayment.
Loans that are generally amortized include home, personal, and car loans.
Advantages of an Amortization Schedule
Here are some reasons why you might want to choose a lender who offers amortized loans:
- Fixed payments – A great thing about an amortized loan is that once you have chosen and confirmed the amortization schedule or plan, you will be able to make a fixed and equal amount of payment each month.
Although the breakup between the principal amount and the interest will be different every month or a few months, the total amount to be paid each month will be the same.
This will allow you to have peace of mind in terms of hitting income goals over the years and always be certain of how your money will be utilised without facing any difficult circumstances.
- Flexible repayment period – Most banks and lenders will have a very flexible repayment period for all their plans, many of which go all the way up to 40 years. Apart from this, if you pay an EMI of Rs. 10,000 every month including principal & interest, you notice that you have the power to pay Rs. 15,000 every month comfortably, then the lender will allow you to do so as they earn money faster and you also get to pay less interest in the long term.
- Easy to asses the right option – With the help of amortization calculators and schedules, you will easily be able to see how much you have to pay every month depending on your total amount, rate of interest, and the repayment period. Using the online calculator, you can adjust the values easily and within a matter of seconds, you will get the exact values for different amortization schedules.
How to Choose an Amortization Table?
Choosing the right amortization loan plan will depend on how much you can pay each month to repay the loan while also ensuring that you have enough money to keep running your household and basic needs.
The more you can pay each month, the shorter the repayment period will be. And in such a case the total amount you finally end up paying is also less.
The further you extend the repayment period, the more comfortable it will be to make monthly repayments, but you will also end up paying a much bigger total amount because of the interest that is applied to the extended period.
Piramal Group is one of India’s oldest companies that has been operating for over 40 years. Piramal Finance is a branch of this company that helps people understand personal finance and take better decisions along with providing various financial services. To know more, check out the Piramal Finance website.