Loan Amortization

First I’d like to talk about how little amortisation works just spent. Everybody knows that when you board money will loan balance with the principle as it’s called Who’s going to decline over time as you continue to make your payments.

But how exactly does that work. Well let’s say that you borrow a \$10000 for five years at 5 percent interest rate your monthly payments are going to calculate to \$188 71 cents. But does every penny of that hundred eight dollars and seventy one cent payment get a plot against a \$10000 loan.

No because each payment has a different amount of interest and principal comprising it. So for example at the start of that loan all \$10000 outstanding were unpaid.

Right. Well since the loan costs five percent interest which is another annual number if \$10000 were to be outstanding for the entire year. And you know \$500 for the privilege of using that money for that time \$10000 times. Five percent interest is \$500 but you’ve only really have that 10000 for a month because your first

payment is going to do with the end of it. So therefore you’d only own one twelfth of that fifth \$500 of annual interest or \$41 and 67 cents. So if your monthly loan payments are \$180 to 70 cents and if the interest for that month is \$41 to 67 cents then 188 71 minus 40 167 equals \$147 for a sense of principle that will actually get deducted from the \$10000 loan you took out that’s how loan amortization works.

Each month your balance is going to decline by the difference between the monthly payment you make and the amount of interest that you go on with every loan balances at that time. Consequently over the course of time more and more of your monthly payment will go towards principal pay down.