Amortization is the reduction in loan balance over the period of loan. An amortization table helps a user understand how the loan balance declines over time. A loan balance declines because a part of the payment made by the recipient of a loan is applied towards the principal or the loan and the other part is applied towards the interest which is the cost of the loan. Initially, during the life of the loan, a major portion of the payment is applied towards the interest and the remainder towards the principal, but further into the life of a loan, a larger part of the payment is applied towards the principal, and consequently, the loan declines more rapidly.
Let's look at an example: Consider a $ 100 loan with a 5% rate of interest. You are expected to pay the loan over 10 years. At the end of the first year, the loan balance declines to $ 92.05. This is calculated as follows:
1. First the interest amount is calculated = Principal x Interest = 100 x 5% = 5
2. The annual payment is 12.95
3. The amount paid towards principal = annual payment - interest payment = 7.95
4. Loan Balance at end of year = Starting balance - Principal = 100 - 7.95= 92.05
You can reduce the interest paid on a loan by increasing the payment made towards the principal. Thus, if you pay an additional amount towards the principal, the interest amount reduces.
You can create an amortization table by visiting the following URL at the anawise.com website: http://anawise.com/mortgage-calculators/amortization-mortgage-calculator.php
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