Throw Out That Amortization Schedule (Maybe)

When discussing loan topics from A to Z, amortization falls near the very beginning of the alphabet. It's a straightforward concept. An amortized loan schedules identical payments that cover both principal and interest. Typically, each installment's funds pay interest first. Principal is paid down and reduced by whatever's left.

Initially, a large proportion of an amortized loan goes towards interest. But with each standard payment, principal reduces a bit. The proportion of interest paid in each installment decreases over the course of the loan. By the end of the term, most of the installment goes to principal, and very little goes to interest. This means that, throughout the life of the loan, principal and interest have an inverse relationship.

You can see this pattern play out beautifully in an amortization table displaying the payment schedule over the entire course of a loan. For each installment, this generally includes:

·      Amount due

o  Amount that's interest

o   Amount that's principal

·      Loan balance after the payment is applied

There's just one problem with that amortization schedule: as soon as a borrower diverges and pays too much or too little, all that precise and well laid-out information is wrong. Maybe it's just a bit off, but the damage has been done. Time to start over. 

With Moneylender Professional loan servicing software, it's easy to account for over- or underpayments. Your original amortization table may no longer be valid, but your loan records are.