Amortization Schedule

https://youtu.be/cr9ybCl8q0I
What is an Amortization Schedule?
An amortization schedule is a table that provides the details
of the periodic payments for an amortizing loan. The
principal of an amortizing loan is paid down over the life of
the loan. Typically, an equal amount of payment is made
every period.
 Understanding Amortization Schedules
Periodic payments are made for amortizing loans, such as a car or home mortgage. Each payment
consists of two components – interest charge and principal repayment. The percentage of interest
or principal repayment varies for different loans.
The amount of interest charged for each period depends on the predetermined interest rate and
the outstanding balance of the loan. The remaining portion of the periodic payment is applied to
repay the principal. Only the portion of the principal repayment reduces the remaining loan
balance.
With a specified loan amount, the number of payment periods, and the interest rate, an
amortization schedule identifies the total amount of the periodic payment, the portions of interest,
the principal repayment, and the remaining balance of the loan for every period.
Typically, the remaining balance of an amortizing loan diminishes as time passes, with principals
repaid. Thus, the interest amount for each period also decreases over time, and the principal
repayment increases gradually.
 Methods for Amortization Schedule
There are multiple methods to amortize a loan. Different methods lead to different
amortization schedules.

1. Straight line
The straight-line amortization, also known as linear amortization, is where the total interest
amount is distributed equally over the life of a loan. It is a commonly used method in accounting
due to its simplicity. With fixed periodic total payment and interest amount, the principal
repayment is also constant over the life of the loan.
2. Declining balance
The declining-balance method is an accelerated method of amortization where the periodic
interest payment declines, but the principal repayment increases with the age of the loan. In
such a method, each periodic payment is greater than the interest charged (interest rate times
the beginning loan balance of the period); the remaining part repays the principal, and the loan
balance declines. The declining loan balance leads to lower interest charges, and thus
accelerates the repayment of the principal.
3. Annuity
A loan amortized in the annuity method comprises a series of payments made between equal
time intervals. The payments are also typically made in equal amounts. There are two types of
annuity: ordinary annuity, for which payments are made at the end of each period, and annuity
due, for which payments are made at the beginning of each period.
Different types of annuities can cause a slight difference between their amortization schedules.
The higher the interest rate or the longer the loan life, the greater the difference.

4. Bullet
Bullet loans are not typically amortized over the life of loans. Generally, the periodic payments
of a bullet loan cover the interest charges only. It leaves a large amount of the final payment at
the maturity of the loan, which repays the entire principal.
Therefore, the balance outstanding of a bullet loan remains unchanged over the life of the loan
and is lowered immediately to zero at maturity.
5. Balloon
A balloon loan is similar to a bullet loan, which usually repays its entire principal at maturity.
Occasionally, it is amortized with small amounts of principal repayments, but still leaves the
majority paid at maturity. In such a case, the balance outstanding slightly decreases over the
loan life and falls to zero at maturity.

6. Negative amortization
In the negative amortization method, the total payment of a period is lower than the interest
charged for that period. It means that there is nothing left from the periodic payment to repay
the principal, and the remaining interest charge will accumulate to increase the outstanding
balance of the loan. The loan balance increases over time and will be repaid at maturity.
Let us study the example found on pages 84 – 85 of your book
What is a factor rate?
Factor rates are specific to business funding and are less common than annual percentage rates
(APRs), which incorporate the interest rate and fees. Factor rates, sometimes called buy rates,
are typically between 1.1 and 1.5. The rate depends on your:
Small business’ industry
Length of time in business
Sales stability
Average monthly credit card sales
Factor rates are generally associated with high-risk lending products, such as merchant cash
advances or short-term business loans from alternative, nonbank business lenders. These
funding options typically have fast repayment terms and high rates on relatively small amounts,
but lenient eligibility requirements.
Factor rate vs. interest rate vs. APR
Factor rates are multiplied by your financing amount to show the total cost of funding.
An interest rate is the percentage of the principal charged by the lender for borrowing.
The APR reflects the total cost of borrowing as a percentage, including the interest rate and additional fees.
How lenders determine your factor rate
While it’s typically easy for business owners to qualify for short-term
products associated with factor rates, lenders and financing
companies would evaluate several aspects of the business before
assigning a rate.
Before accepting an offer, shop around for financing to get a factor
rate and terms that work for your business. Make sure the cost of
financing is within your budget and repayment terms aren’t too fast
to keep up with.