How To Amortize a Loan

A loan amortization schedule allows you to set up a schedule of regular installments so you can tackle paying back your loans. The following procedure gives you the tools you need to create the schedule.

Instructions

  • Step 1: Set the loan principal P equal to the new balance of your principal on the loan Q, and return to step one, substituted Q in for P. Repeat these steps until the new balance on your principal on the loan Q and the loan balance P both go to zero.
  • FACT: Did you know? Amortization comes from the Latin word mort for death, since a debt is extinguished when it is paid off.
  • Step 2: Calculate the new balance of your principal on the loan Q, which is the loan principal P minus the amount of principal you paid for the month C.
  • Step 3: Calculate the amount of principal you pay in a given month C, which is your monthly payment M minus your monthly interest H.
  • Step 4: Calculate your monthly payment M from the formula: M = PJ / [1 - 1/[(1+J)N] using a calculator with advanced math functions. N is the number of months remaining over which your loan is amortized.
  • TIP: Another way to construct an amortization schedule is to enter the loan amount, interest rate, loan period, and number of payments in a loan amortization spreadsheet, and let the program do the work for you.
  • Step 5: Calculate your current monthly interest H. To do this, multiply your loan principal P by the current monthly interest rate J.

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