Understanding Amortization

Oct 13, 2025 by talynt.org 45 views

Understanding Amortization

Amortization is the process of gradually paying off a loan through regular payments. It involves calculating the interest and principal components of each payment, which helps to reduce the outstanding balance over time. In this article, we will use an amortization table to calculate the loan payments for Laura's loan of $25,000.

Calculating Loan Payments

To calculate the loan payments, we need to use the following formula:

M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]

Where:

M = monthly payment
P = principal loan amount ($25,000)
i = monthly interest rate (7.5%/year / 12 months/year = 0.00625)
n = number of payments (60 months)

Plugging in the values, we get:

M = $25,000 [ 0.00625(1 + 0.00625)^60 ] / [ (1 + 0.00625)^60 – 1] M ≈ $458.19

Amortization Table

Month	Payment	Interest	Principal	Balance
1	$458.19	$143.19	$315.00	$24,685.00
2	$458.19	$141.95	$316.24	$24,368.76
3	$458.19	$140.72	$317.47	$24,051.29
4	$458.19	$139.50	$318.69	$23,732.60
5	$458.19	$138.29	$319.90	$23,412.70
6	$458.19	$137.09	$321.10	$23,091.60
7	$458.19	$135.90	$322.29	$22,769.31
8	$458.19	$134.72	$323.47	$22,445.84
9	$458.19	$133.55	$324.64	$22,121.20
10	$458.19	$132.39	$325.80	$21,795.40
11	$458.19	$131.24	$326.95	$21,468.45
12	$458.19	$130.10	$328.09	$21,140.36
13	$458.19	$128.97	$329.22	$20,811.14
14	$458.19	$127.85	$330.34	$20,480.80
15	$458.19	$126.74	$331.45	$20,149.35
16	$458.19	$125.64	$332.55	$19,816.80
17	$458.19	$124.55	$333.64	$19,483.16
18	$458.19	$123.47	$334.72	$19,148.44
19	$458.19	$122.40	$335.79	$18,812.65
20	$458.19	$121.34	$336.85	$18,475.80
21	$458.19	$120.29	$337.90	$18,137.90
22	$458.19	$119.25	$338.94	$17,799.96
23	$458.19	$118.22	$339.97	$17,460.99
24	$458.19	$117.20	$340.99	$17,120.00
25	$458.19	$116.19	$342.00	$16,778.00
26	$458.19	$115.19	$343.00	$16,435.00
27	$458.19	$114.20	$343.99	$16,091.01
28	$458.19	$113.22	$344.97	$15,746.04
29	$458.19	$112.25	$345.94	$15,400.10
30	$458.19	$111.29	$346.90	$15,053.20
31	$458.19	$110.34	$347.85	$14,705.35
32	$458.19	$109.40	$348.79	$14,356.56
33	$458.19	$108.47	$349.72	$14,006.84
34	$458.19	$107.55	$350.64	$13,656.20
35	$458.19	$106.64	$351.55	$13,304.65
36	$458.19	$105.74	$352.45	$12,952.20
37	$458.19	$104.85	$353.34	$12,598.86
38	$458.19	$103.97	$354.22	$12,244.64
39	$458.19	$103.10	$355.09	$11,889.55
40	$458.19	$102.24	$355.95	$11,533.60
41	$458.19	$101.39	$356.80	$11,176.80
42	$458.19	$100.55	$357.64	$10,819.16
43	$458.19	$99.72	$358.47	$10,460.69
44	$458.19	$98.90	$359.29	$10,101.40
45	$458.19	$98.09	$360.10	$9,741.30
46	$458.19	$97.29	$360.90	$9,380.40
47	$458.19	$96.50	$361.69	$9,018.71
48	$458.19	$95.72	$362.47	$8,656.24
49	$458.19	$94.95	$363.24	$8,293.00
50	$458.19	$94.19	$363.99	$7,929.01
51	$458.19	$93.44	$364.75	$7,564.26
52	$458.19	$92.70	$365.49	$7,198.77
53	$458.19	$91.97	$366.22	$6,832.55
54	$458.19	$91.25	$366.94	$6,465.61
55	$458.19	$90.54	$367.65	$6,097.96
56	$458.19	$89.84	$368.35	$5,729.61
57	$458.19	$89.15	$369.04	$5,360.57
58	$458.19	$88.47	$369.72	$4,990.85
59	$458.19	$87.80	$370.39	$4,620.46
60	$458.19	$87.14	$371.05	$4,249.41

Conclusion

Understanding Amortization

Amortization is the process of gradually paying off a loan through regular payments. It involves calculating the interest and principal components of each payment, which helps to reduce the outstanding balance over time. In this article, we will use an amortization table to calculate the loan payments for Laura's loan of $25,000.

Calculating Loan Payments

To calculate the loan payments, we need to use the following formula:

M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]

Where:

M = monthly payment
P = principal loan amount ($25,000)
i = monthly interest rate (7.5%/year / 12 months/year = 0.00625)
n = number of payments (60 months)

Plugging in the values, we get:

M = $25,000 [ 0.00625(1 + 0.00625)^60 ] / [ (1 + 0.00625)^60 – 1] M ≈ $458.19

Amortization Table

Month	Payment	Interest	Principal	Balance
1	$458.19	$143.19	$315.00	$24,685.00
2	$458.19	$141.95	$316.24	$24,368.76
3	$458.19	$140.72	$317.47	$24,051.29
4	$458.19	$139.50	$318.69	$23,732.60
5	$458.19	$138.29	$319.90	$23,412.70
6	$458.19	$137.09	$321.10	$23,091.60
7	$458.19	$135.90	$322.29	$22,769.31
8	$458.19	$134.72	$323.47	$22,445.84
9	$458.19	$133.55	$324.64	$22,121.20
10	$458.19	$132.39	$325.80	$21,795.40
11	$458.19	$131.24	$326.95	$21,468.45
12	$458.19	$130.10	$328.09	$21,140.36
13	$458.19	$128.97	$329.22	$20,811.14
14	$458.19	$127.85	$330.34	$20,480.80
15	$458.19	$126.74	$331.45	$20,149.35
16	$458.19	$125.64	$332.55	$19,816.80
17	$458.19	$124.55	$333.64	$19,483.16
18	$458.19	$123.47	$334.72	$19,148.44
19	$458.19	$122.40	$335.79	$18,812.65
20	$458.19	$121.34	$336.85	$18,475.80
21	$458.19	$120.29	$337.90	$18,137.90
22	$458.19	$119.25	$338.94	$17,799.96
23	$458.19	$118.22	$339.97	$17,460.99
24	$458.19	$117.20	$340.99	$17,120.00
25	$458.19	$116.19	$342.00	$16,778.00
26	$458.19	$115.19	$342.99	$16,435.00
27	$458.19	$114.20	$343.99	$16,091.01
28	$458.19	$113.22	$344.97	$15,746.04
29	$458.19	$112.25	$345.94	$15,400.10
30	$458.19	$111.29	$346.90	$15,053.20
31	$458.19	$110.34	$347.85	$14,705.35
32	$458.19	$109.40	$348.79	$14,356.56
33	$458.19	$108.47	$349.72	$14,006.84
34	$458.19	$107.55	$350.64	$13,656.20
35	$458.19	$106.64	$351.55	$13,304.65
36	$458.19	$105.74	$352.45	$12,952.20
37	$458.19	$104.85	$353.34	$12,598.86
38	$458.19	$103.97	$354.22	$12,244.64
39	$458.19	$103.10	$355.09	$11,889.55
40	$458.19	$102.24	$355.95	$11,533.60
41	$458.19	$101.39	$356.80	$11,176.80
42	$458.19	$100.55	$357.64	$10,819.16
43	$458.19	$99.72	$358.47	$10,460.69
44	$458.19	$98.90	$359.29	$10,101.40
45	$458.19	$98.09	$360.10	$9,741.30
46	$458.19	$97.29	$360.90	$9,380.40
47	$458.19	$96.50	$361.69	$9,018.71
48	$458.19	$95.72	$362.47	$8,656.24
49	$458.19	$94.95	$363.24	$8,293.00
50	$458.19	$94.19	$363.99	$7,929.01
51	$458.19	$93.44	$364.75	$7,564.26
52	$458.19	$92.70	$365.49	$7,198.77
53	$458.19	$91.97	$366.22	$6,832.55
54	$458.19	$91.25	$366.94	$6,465.61
55	$458.19	$90.54	$367.65	$6,097.96
56	$458.19	$89.84	$368.35	$5,729.61
57	$458.19	$89.15	$369.04	$5,360.57
58	$458.19	$88.47	$369.72	$4,990.85
59	$458.19	$87.80	$370.39	$4,620.46
60	$458.19	$87.14	$371.05	$4,249.41

Q&A

Q: What is amortization? A: Amortization is the process of gradually paying off a loan through regular payments.

Q: How do I calculate my loan payments? A: To calculate your loan payments, you need to use the following formula: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]

Q: What is the monthly payment for Laura's loan? A: The monthly payment for Laura's loan is $458.19.

Q: How long will it take to pay off Laura's loan? A: It will take 60 months to pay off Laura's loan.

**Q: What is the interest and principal components of