The Loan Amortization

1
The Loan Amortization

• Business 4099

K. Hartviksen
2
Blended Interest and Principal Loan Payments

• There are a number of alternative approaches that
  may be used to repay a loan.
• One of the most common is a fixed payment, fixed
  term loan where each payment covers the
  accumulated interest plus enough of the principal
  so that over the amortization period of the loan,
  the principal is retired.
• The formula for such a loan is found on the next
  slide

3
Blended Interest and Principal Loan Payments -
formula
Where Pmt the fixed periodic payment t the
amortization period of the loan r the rate of
interest on the loan
4
Blended Interest and Principal Loan Payments -
example
Where Pmt unknown t 20 years r 8
5
Blended Interest and Principal Loan Payments -
example
Where Pmt unknown t 20 years r 8
This assumes you make annual payments on this
loanmost financial institutions want to see
monthly payments.
6
Loan Amortization Tables

• It is often useful to break down the loan payment
  into its constituent parts.

7
How are Loan Amortization Tables Used?

• To separate the loan repayments into their
  constituent components.
• Each level payment is made of interest plus a
  repayment of principal outstanding on the loan.
• This is important to do when the loan has been
  taken out for the purposes of earning taxable
  incomeas a result, the interest is a
  tax-deductible expense.

K. Hartviksen
8
Loan Amortization Tables
K. Hartviksen
9
Loan Amortization Example
In the third year, 800 of interest is paid.
Total interest over the life of the loan 2,400
1,600 800 4,800