How to Calculate Amortization of Personal Loan & its Benefits

Posted on Thursday, February 23rd, 2023 | By IndusInd Bank

Amortization refers to paying off your loan through principal and interest payments over time. Benefits of calculating amortization include easier evaluation of loan options, a better understanding of your loan, and assistance in making better financial decisions, among others.

For most people, the idea of taking out a loan evokes some dread and trepidation. A loan is, after all, a liability that a borrower has to shoulder until it is paid off in full.

But that said, a personal loan is very often the only feasible option when faced with a financial emergency that calls for a substantial amount of money. Besides, this loan type is also extremely convenient for those in need of urgent funds – it is collateral-free and can be repaid in monthly instalments.

If you are planning to apply for a personal loan, it is important to gain a thorough understanding of all its aspects. One of these is amortization. Here is everything you need to know about calculating amortization of your personal loan and its related benefits.

What is Amortization?

• In simple terms, amortization is a technique used to lower the value of an intangible asset or a loan over a period of time.
• Speaking specifically of a personal loan, amortization refers to the process of spreading out the repayment of the loan over time via regular instalments of interest and principal such that it is paid off in full by the maturity date.
• This is carried out with the help of an amortization schedule i.e. a structured payment method such as an Equated Monthly Instalment (EMI).
• Usually, an amortization schedule allocates a higher percentage of the EMI towards interest early in the loan. But with each subsequent payment, the payment towards the principal amount increases and the repayment of monthly interest decreases.

How to Calculate Amortization of Personal Loan

The best way to understand amortization is through an amortization table.  An amortization table neatly details each month’s loan payment as well as how much of that monthly payment goes towards interest and how much to the principal.

The table below is an amortization table or schedule, illustrating how each EMI you pay affects your loan. For example, you avail of a personal loan of INR 20,000 at an interest rate of 5% and a tenure of 60 months. A personal loan EMI calculator can help you calculate the EMI, which comes to roughly INR 377.42. Here’s the amortization schedule for the first four and last two months. 

Benefits of Calculating Amortization of Personal Loan

The practical benefits of calculating amortization are as follows:

1)    Offers a better understanding of your loan: Amortization helps potential borrowers understand how their loan repayment works, laying out the different parts of a loan in detail.

2)    Evaluate loan options with ease: By highlighting the cumulative cost of interest, an amortization table helps you evaluate loan options with ease.

3)    Make informed financial decisions: Banks typically offer different interest rates. Knowing your amortization schedule in advance can help you make prudent, well-informed decisions about which personal loan to choose and from which lender.

4)    Adjust the timeline in future: Being aware of the cumulative amount of interest through the amortization schedule may encourage you to adjust the loan’s timeline.

You could make additional payments to reduce the principal amount, bringing down the cost of interest in the months to come.

IndusInd Bank Personal Loan EMI Calculator

If you are looking to take out a personal loan, it is best to opt for one with terms tailored to your requirements. The easiest way to identify such terms is to use a personal loan calculator which provides details of your payable EMIs. Additionally, it often helps you figure out your repayment pattern with an amortization table displaying the breakup of the repayable loan amount.

If you wish to calculate your EMI based on the principal amount and interest, you may always rely on IndusInd Bank’s highly accurate personal loan EMI calculator. This free, easy-to-use, and efficient online tool shows instant results, allowing you to plan your future financial liabilities with care.

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.