It’s nearly a certainty that you’ll need to take out a loan at some point in your life. Whether it’s school loans, an auto loan, or a mortgage, you’ll need to pay the money back on a monthly basis until the lender has been made whole. If you have multiple loans, repayment can get particularly tricky. But if you know how to set up a loan repayment schedule, you’ll never miss a beat.
How to make a loan amortization schedule
Dan Caplinger, a contributor to Motley Fool, notes most lenders will provide a loan amortization schedule whenever you take out a fixed-rate loan with a set term for repayment. This document will include a list of minimum payments that you’ll make over the lifetime of the loan. Payments are broken down to show how much of the total goes toward the principal amount and interest.
In rare cases or in cases where you’re taking out a loan from a family member, you’ll need to calculate your own payoff schedule. For this, Caplinger recommends using a mortgage calculator or similar tool that lets you put in the total amount of the loan, interest rate, and repayment term.
You can also create an Excel spreadsheet that uses the PMT function to calculate your monthly payment. Say you borrow $10,000 at 5 percent interest and plan to pay it back in monthly installments over 24 months. Enter the formula =PMT(5%/12,24,10000) into a cell and you’ll get a monthly payment amount of $438.71.
You can use this formula to calculate a more manageable monthly payment and see the impact it will have on interest over the life of the loan. Using the same formula but changing the repayment term to 36 months, your monthly payment decreases to $299.71. This would mean that you’ll pay $10,789.56 over the life of the loan. If you repay the amount in 24 months, you would pay $10,529.04 instead — saving $260.52 in interest. Increasing the repayment term decreases the monthly payment, but it comes at a cost. The longer the term of the loan, the more money you’ll pay out in interest.
List and rank your debts
Many Americans have multiple lines of credit or loans in repayment at once, which can create quite a balancing act. Miriam Caldwell, a contributor with The Balance, suggests making a list of all your debts to give yourself a full picture of what you owe and when you can expect to pay off the debt. This would include the current amount owed, interest rate, and minimum monthly payment.
From here, Caldwell recommends ranking these debts in the order in which you’d like to pay them off. You could start by prioritizing the debt with the lowest outstanding balance or by focusing on the debt with the highest interest rate. Once you’ve identified the debt you want to pay off first, you can focus any additional money you have toward that goal. However you choose to tackle it, Caldwell suggests focusing on paying off one debt at a time.
When you come into extra money and decide to put it toward paying off debt, it’s still a smart idea to save some for bolstering your savings. Having a month or two of income saved up can help you avoid missing payments and incurring exorbitant fees if you come into some hardship.
If you’re struggling with managing debt, consulting with a financial expert can help alleviate stress and put you on a path to becoming debt-free.