How to read and understand amortisation schedules
Saumya Raut When you apply for a Loan, whether it is for a home, car, or business, understanding how your repayment works is just as crucial as getting the best interest rate. This is where amortisation schedules play a critical role. They help you visualise how each Equated Monthly Instalment contributes towards repaying your Loan over time.
By decoding this schedule, you can see how much goes toward interest, how much reduces your principal, and how your total balance changes month after month. To put it simply, it is the financial roadmap of your Loan journey.
What is an amortisation schedule?
An amortisation schedule is a detailed table that outlines each payment you make on a Loan. It breaks down each EMI into two parts: interest and principal repayment, and shows the remaining outstanding balance after each instalment. This transparency helps borrowers clearly track how their debt decreases over time.
For example, in the early stages of a Loan, a primary portion of your EMI goes toward paying interest. As the balance reduces, the share of principal repayment increases, helping you become debt-free gradually and systematically.
How does the amortisation formula work?
The amortisation formula is used to calculate the fixed monthly payment required to repay the Loan in full over its term. The formula is:
EMI = [P × r × (1 + r) ^n] / [(1 + r)^n – 1]
Where:
EMI: Equated Monthly Instalment
P: Principal Loan amount
r: Monthly interest rate (annual interest rate ÷ 12)
n: Total number of monthly instalments
This formula ensures your payments remain consistent throughout the Loan period, even as the proportions of interest and principal change.
Why understanding the Loan amortisation schedule matters
Understanding the Loan amortisation schedule helps borrowers plan their finances efficiently. By knowing how each payment is structured, you can:
- Predict your outstanding balance at any point in the Loan tenure.
- Identify how much interest you pay overall.
- Plan for prepayment or refinancing at the right time.
- Manage your monthly budget with better clarity.
For instance, if you notice that most of your payments in the first few years go toward interest, making part-prepayments during that phase can lower your total interest outflow significantly.
Benefits of reviewing your amortisation schedule
Financial transparency: You gain a clear picture of where your money is going each month.
Informed decisions: It helps you assess the actual cost of borrowing before opting for a Loan.
Prepayment planning: By seeing how early repayments affect your Loan balance, you can save substantially on interest.
Loan comparison: Comparing amortisation schedules from different lenders lets you choose the most cost-effective option.
Tax insights: Reviewing your amortisation schedule helps track interest payments eligible for tax benefits.
Conclusion
An amortisation schedule is more than a table. It is a strategic tool for smarter financial planning. By understanding how it works, along with it formula and benefits, you gain better control over your repayment strategy. When managing any Loan, regularly reviewing your amortisation schedule keeps you informed, empowered, and one step closer to financial freedom.
