If you’re a homeowner, the concept of Amortization and payment schedule should be familiar. They both refer to the process of paying off debt; however, these terms are often confused as the same. In this post, you’ll learn about the differences between Amortization and payment schedule to better understand how your mortgage works!
According to financial advisors at Lantern by SoFi, “Amortization refers to the process of paying off a loan (a car loan or any other kind of loan) according to a predetermined schedule. When a loan follows an amortization schedule, the payments are divided between the principal owed and the finance charges.”
The loan balance is reduced by paying off part of it with each payment, but at least some interest will remain on every payment until all principal is repaid. Amortize comes from a French word for “death,” referring to how an individual’s lifespan can be used up by debt over time. For example, if you want to pay off your car loan, you can apply for car payment amortization to get an easy payment solution.
One way to think about amortization schedules is as tables showing how much you’ll pay down your mortgage over time, including both principal and interest debts owed on it.
A payment schedule or payment table lists principal and loan interest payments. It doesn’t account for any extra costs, such as origination fees, but it does show how much each payment covers. The payments are listed in chronological order, and the total amount paid over time is indicated at the bottom.
You’ll see this document when you’re taking out a mortgage or car loan, or even if you’re paying off student loans with monthly payments instead of one lump sum upon graduation.
Difference Between Amortization And Payment Schedule
Amortization is the process of paying off a loan in installments. This happens over time, and this is done by dividing the amount borrowed into equal amounts to be paid regularly. For example, if you have taken out a $30,000 loan at an interest rate of 10%, it will take you 30 years to pay back your debt if you make monthly payments of $300 for 30 years.
The payment schedule refers to the amount and due date of each payment made towards principal reduction or to cover interest charges for any given period. A payment schedule is prepared for an amortized loan where payments are made periodically based on fixed intervals or, more frequently, on actual cash flows from operations. In addition, it provides more flexibility than amortization schedules which only provide fixed terms for repayment plans.
The amortization schedule represents how much funds need to be paid off every month by reducing the principal amount owed while keeping interest rates constant throughout its entire duration (which usually lasts until all debts have been paid off entirely).
Learning the difference between Amortization and payment schedule can be pretty confusing. However, once you understand the basics of each, it becomes pretty easy to differentiate between them. Therefore, it is crucial to understand both terms as they are used in business transactions and companies’ financial statements.