3 ways your amortization schedule can make you a smarter borrower

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Amortization schedules facilitate financial decisions.

Key Point

• The amortization schedule shows how much the loan actually costs.
• Amortization schedules can take emotion out of purchasing decisions.
• Savvy borrowers rely on amortization schedules to make decisions that are best for them.

Amortization schedules may (literally) be the most boring subject to throw at you this year. Stocks are exciting, startups are attractive. An amortization schedule is, well, an amortization schedule. So why are we bringing them up? Know that understanding your amortization schedule can elevate you from an “average borrower” to a “genius borrower.” Method is as follows.

What is an amortization schedule?

Stick with us here. If you fall asleep at this point in the article, you’ll miss out on all the good things.

When you take out a loan, part of each payment is used to pay principal and part is used to pay interest. Think of it this way. If you took out a $10,000 interest-free loan with a 60-month repayment period, you would know exactly how much of your payment went into paying off the principal of the loan. As long as you make monthly payments of $167, your principal will decrease by $167 and your loan will be fully paid off in 60 months.

But what if the interest rate is 7.25%? Off the top of your head, can you figure out how much of your monthly payment is principal and how much is interest?

Most of us rely on the amortization schedule to show exactly how much of each payment goes towards paying off the loan. It looks like a simple table, but it can be a powerful decision-making tool.

1. Become a borrower and understand the true cost of a loan

Suppose you have a very tight budget, but your dream car costs $60,000. He finds it to be more than he needs, but when the loan term is extended to 10 years he seems to be able to manage the monthly payments. Yes, convince yourself that you can afford to pay his APR of 6% and monthly payments of $667.

That’s where amortization schedules come in (and you’ll soon consider them your best friend).

An amortization schedule is like your friend saying your salad is stuck between your two front teeth or your fries are down. It’s brutally honest.

The amortization schedule shows how much of your monthly payment will be used to repay the principal. If you scroll to the bottom of the page, you’ll also see the exact amount you’ll pay in interest over the life of the loan. That’s less than $20,000 for your dream $60,000 car.

And like any good friend, the amortization schedule will give you a gentle slap in the back of your head, prompting you to rethink your strategy.

If you really want that vehicle, there are some suitable options.

• Pay other bills or wait until you make more money and take a 5-year loan instead. Your monthly payments will be $1,160, but your total interest will be $9,600 instead of $20,000. Become. That’s over $11,000 in extra money to save or invest in the future.
• Wait until you have saved a fair down payment. Let’s say she slowly puts away enough to pay a $10,000 down payment on her dream ride. This brings her monthly payments to $967 over five years, paying a total of $8,000 in interest.

3. Be a discerning borrower

Sales people have a job to do. A realtor wants you to buy a house and a car salesman wants to sell you a car. No shame there. However, when someone tries to say, “Hey! We can extend the loan term and pay less,” there’s an amortization schedule that offers the real scoop.

It’s your life and it’s your money. You decide whether to put money in your bank account or spend it. It’s up to you to decide if a loan is right for you at this time. Amortization schedules also help you make the right decisions.