LOAN AMORTIZATION

LOAN AMORTIZATION
- refer to the process of paying off debt over
time in regular installments of interest and
principal sufficient to repay the loan in full
by its maturity date, like housing and car
loan requires the borrower to pay that equal
amount either annually, semi-annually ,
quarterly or most of the time monthly
LOAN AMORTIZATION
Contents of a loan agreement
 Amount of principal
 Maturity date and provision for repayment
 Term of the loan (lump sum, monthly, etc.)
 Grace period, if applicable
 Interest rates
 Loan/bond covenants (i.e. required ratios to be maintained)
 Penalties for default
 Collateral documents, if applicable
LOAN AMORTIZATION

The best way to understand loan amortization

is by reviewing an amortization table. If you
have a mortgage, the table was included with
your loan documents.
AMORTIZATION TABLE
- is a schedule that lists each monthly loan
payment as well as how much of each
payment goes to interest and how much to
.

the principal
AMORTIZATION TABLE

is a schedule
.
that lists each monthly loan
payment as well as how much of each
payment goes to interest and how much to
the principal
AMORTIZATION TABLE
**There are 3 main things you need when
calculating amortization.
1.principal amount of the loan
.
2.the interest rate
3.the loan term.

**You also need the amount of the monthly

payment amount.
AMORTIZATION TABLE
1. The first thing you need to know is that your
monthly payments on your loan are actually
two parts.
.
a. One portion goes back to paying back the
principal amount of the loan.
b. The other portion goes towards paying the
interest on the loan. As the principal payments
portion increases, the interest portion will go
lower.
AMORTIZATION
SCHEDULES
- contains important details of periodica loan
payment
- Amortization schedules begin with the
.
outstanding loan balance. For monthly payments, the
interest payment is calculated by multiplying the
interest rate by the outstanding loan balance and
dividing by twelve. The amount of principal due in a
given month is the total monthly payment (a flat
amount) minus the interest payment for that month.
AMORTIZATION
SCHEDULES
- contains important details of periodica loan
payment
- Amortization schedules begin with the
.
outstanding loan balance. For monthly payments, the
interest payment is calculated by multiplying the
interest rate by the outstanding loan balance and
dividing by twelve. The amount of principal due in a
given month is the total monthly payment (a flat
amount) minus the interest payment for that month.
Types of Loan Schedule
1. Even principal payment
- the principal amount is evenly distributed
based .on the term of the loan, and the interest
is calculated based on the unpaid balance of
the loan each payment period. Since the
unpaid principal amount declines with each
payment, the interest amount each loan
payment decreases
1. Even principal payment
Illustration: Makata corporation avails a 5-year
loan from XYZ Bank amounting to Php.
1,000,000 with an interest rate of 8% per
.
annum.
To create the even principal loan payment,
carefully follow these steps:
1. Even principal payment
1. Calculate the installment payment of the
loan by dividing the principal amount to the
number of payments or terms of the loan.
.
Yearly payment = Principal amount
Term of the loan
= Php. 1,000,000.00
5
Yearly payment = Php. 200,000.00
1. Even principal payment
2. Compute for the interest payment for the 1st period
by multiplying the loan balance to the interest rate:
1st Interest payment = loan balance x interest rate
.
= Php. 1,000,000.00 x .08
= Php. 80,000.00

3. Add the principal payment and the interest

payment to get the total payment for the period
1. Even principal payment

4. Subtract the principal payment to the balance of

the loan to determine the remaining unpaid loan
.
balance.
5. Repeat steps 2-4 until the loan balance is paid
    XYZ BANK    
  1. Even Makata
Borrower:
principal payment
Corporation
 
 
Loan Terms: 5 years  
Rate: 8%  
Amount Granted: Php. 1,000,000.00  
Date Granted: October 11, 2020  
         
Date . Total Payment Principal Interest Unpaid Balance
10/11/2020       1,000,000.00
10/11/2021 280,000.00 200,000.00 80,000.00 800,000.00
10/11/2022 264,000.00 200,000.00 64,000.00 600,000.00
10/11/2023 248,000.00 200,000.00 48,000.00 400,000.00
10/11/2024 232,000.00 200,000.00 32,000.00 200,000.00
10/11/2025 216,000.00 200,000.00 16,000.00 -
Total 1,240,000.00 1,000,000.00 240,000.00  
1. Even principal payment
In case where the interest rate and loan terms are
given on a monthly basis, the computation is done
the same.
way. In other cases, the given interest rate
is reflected yearly but the payment terms is different
( semi- annual, quarterly, monthly or even daily). In
cases like this make sure that the interest rate and
terms of the loan are reconciled before creating the
loan schedule
2. Even total payments
- the interest rate payment declines and the
principal payments increases as loan payments
progress.
.
The loan payment is constant since the
decreased in the interest is being matched by the
increase in principal payment.
Let us make the even total payments loan
amortization schedule based on the data in the
previous illustration.
2. Even total payments
To create an even total payments loan
amortization schedule, follow these given steps:
1. Calculate
.
the installment payment (yearly, semi-
annually, quarterly, monthel,…etc.) Make sure
the interest rate terms of the loan are reconciled
before creating the loan schedule.
2. Even total payments
where:
P = Principal loan amount
r = interest rate per period
n= .period of loan

= Php. 250,456.45
1. Even principal payment

3. Get the principal payment by subtracting the

interest payment to get the installment payment
.
4. Subtract the principal payment to the balance of
the loan to determine the remaining unpaid loan
balance.
5. Repeat steps 2-4 until the loan balance is paid
2. Even total payments
2. Compute for the interest payment
for the 1st period by multiplying the
loan
.
balance to the interest rate:
1st Interest payment = loan balance x interest
rate
= Php. 1,000,000.00 x .08
= Php. 80,000.00
 2. Even total payments
    XYZ BANK    
   
Borrower: Makata Corporation  
Loan Terms: 5 years  
Rate: 8%  
Amount Granted: Php. 1,000,000.00  
.
Date Granted: October 11, 2020  
         
Date Total Payment Principal Interest Unpaid Balance
10/11/2020       1,000,000.00
10/11/2021 250,456.45 170,456.45 80,000.00 829,543.55
10/11/2022 250,456.45 184,092.97 66,363.48 645,450.58
10/11/2023 250,456.45 198,820.40 51,636.05 446,630.18
10/11/2024 250,456.45 214,726.04 35,730.41 231,904.14
10/11/2025 250,456.45 231,904.12 18,552.33  
Total 1,252,282.25 1,000,000.00 252,282.28  
2. Even total payments

Take note: Slight adjustment is sometimes possible at the last

period payment due to the rounding-off of numbers
.
Effective Annual Interest Rate

.
Effective Annual Interest Rate

where:
R = Annual Interest rate
M = Frequency of compounding
 Effective Annual Interest Rate

Based on the computation although VVV banks seems to have a

higher nominal interest rate but based on the effective annual
interest rate, BBB bank’s investment plan is better for the
investor
 Effective Annual Interest Rate

When it comes to loan or other interest-bearing debt, it would

be better for the borrower to look for a lower effective annual
interest