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Simple Interest Amortization Schedule

April 21st, 2008

The idea of creating a simple interest amortization schedule usually arises when someone needs to make a relatively large purchase and must borrow money, usually in the form of a home mortgage or auto loan. The concept of amortizing a loan simply means to pay it off and decrease its amount over time. In fact the word amortize was originally derived from the French word amortir, which means “to bring death”. This is presumably what we want to do with our debts.

An amortization schedule is simply a table or chart that shows the amount of each payment on a loan, along with other relevant data such as the principal (the original amount of the loan), periodic interest paid, cumulative interest, and the remaining balance. It is useful for figuring out what your monthly payments are going to be for different interest rates and loan amounts, as well as how much interest you will wind up paying over the life of the loan.

In order to make a simple interest amortization schedule manually, you can use the following formula to determine your periodic (usually monthly) payment represented by the letter A:

amortization-payment-formula.png

P is the principal, i is the periodic interest rate, and n is the total number of periods or payments that will be made before the loan is fully paid.

However, almost no one except for a small number of mathematical purists or people afflicted with severe cases of technophobia would want to go through the rigorous process of creating an amortization table manually. Fortunately in the 21st century computer age, we have handy little things like Excel spreadsheets that will do the computations automatically and present the relevant data in an easily readable form without having to crunch the numbers by hand or even use a calculator. You can download a spreadsheet program such as this for free at Vertex42.com. Here is a screenshot of what it looks like:




amortization-table.jpg




This program is pretty easy to use; all you have to do in order to create a new table is to click on one of the cells beside the phrases “Loan Amount”, “Interest rate”, or “Total # of Periods” and change the number in the fx bar at the top to your preferred value. Then click on any other cell and all of the numbers in the table will be recalculated. This can be fun to play around with by trying out different figures for the principal amount, interest rate, and loan term.

By using a simple interest amortization schedule, we can see how important it is to get a favorable interest rate as well as the benefits of making a substantial down payment in the beginning, thus reducing the amount that would need to be financed. For example, on a $20,000 car loan that is financed at 10% and amortized over a 60-month (5 year) time frame, we would wind up paying a total of $5,496.45 in interest with a monthly payment of $424.94.

However, if we were able to control our impulsive buying urges long enough to save up $10,000 first and then finance the remainder over a shorter 36-month period, we could reduce the monthly payment to $322.67 but more importantly, the total interest paid would be only $1,616.19. This adds up to a significant difference in our long term cash flow because we can reduce our recurring expenses and eliminate them more quickly, thus freeing up more of our income for business building activities and investments.


3 Responses to “Simple Interest Amortization Schedule”

  1. comment number 1 by: ireland5

    Need to do a post on how to figure the interest earned in savings or investment with a fixed rate.

  2. comment number 2 by: amortization formula

    I had download and use it. It’s very easy to use and quite simple to understand. Thank you for such a great tools. I will open for my mortgage after new year. Thanks again.

  3. comment number 3 by: הלוואות

    That was a very invested post thank you was delecious to read

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