AMORTIZATION SCHEDULE
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A table showing each loan payment over time, breaking out the portions applied to interest and to principal until the balance is repaid.
Summary
An amortization schedule is like a roadmap for loan repayment that shows exactly how each monthly payment is split between paying interest (the cost of borrowing money) and paying down the principal (the actual amount you borrowed). Early in the loan, most of your payment goes to interest, but over time, more goes toward reducing the principal balance. This schedule helps borrowers understand how their debt decreases over time and how much interest they'll pay in total.
Usage Context
Essential when studying loan analysis, mortgage calculations, personal finance planning, investment decisions, and understanding the time value of money. Critical for making informed borrowing decisions and evaluating the true cost of debt.
Common Confusions
- Thinking that equal portions go to interest and principal throughout the loan
- Not understanding why early payments are mostly interest
- Confusing the payment amount with the principal reduction amount
- Believing that making extra payments only saves a small amount of money
- Not realizing that the schedule changes if interest rates are variable
