How does a loan repayment schedule work?

Loan repayment is the procedure through which your debt – be it a Home Loan, a Personal Loan, or an Education Loan – is paid back to the lender along with due interest. The loan’s repayment is planned with the help of a loan repayment schedule. The loan repayment schedule plans the repayment of your loan through Equated Monthly Instalments or EMIs. Banks plan their loan repayment schedule based on what they call an amortization table.

How does a loan repayment schedule function?
 

A loan repayment schedule or an amortization schedule functions on a simple principle. Every loan has two components in it – the interest component and the principal component. A loan repayment schedule is planned for the borrower to contribute more – through their EMIs – towards the interest component of the loan initially; and progressively contribute more towards the principal component, as the loan interest gets repaid. 

What is an EMI amortization schedule?

Loan repayment schedules are also called EMI amortization schedules. In this section, we will present an EMI amortization schedule to you in the form of a simple table. The example we have picked is that of a loan amounting to ₹12 lakhs for an interest rate of 12% and a time period of 5 years, that is 60 months. Take a look at the “amortization table” for this loan’s repayment:

Here is the information that you will find in your loan repayment schedule

While the EMI amortization schedule that we exemplified in the previous section is a lot more simplified than the ones lenders publish while informing the borrower of their loan repayment schedule; let us go through a comprehensive list of information that you can find in a loan repayment schedule, to help you understand its function better:

· Loan details
 

Your loan repayment schedule is a document that contains many important details concerning your loan. These details include the total loan amount, the loan’s tenure, and its rate of interest.

· Payment frequency

The repayment schedule also contains an account of the frequency at which the borrower is supposed to make contributions toward their loan. The payment frequency generally is 12 times a year; that is monthly, however, the payment frequency could change depending on the lender’s terms and conditions.

· The total monthly EMI

The lender mentions the total monthly EMI to be paid clearly in the loan repayment schedule. You could also take the assistance of a personal loan EMI calculator like the one on the IDFC FIRST Bank website to calculate this figure for your personal loan.

· Extra payments

Often, borrowers who have an excess of funds contribute a higher amount toward their loan than the monthly EMI amount. Such payments get recorded as ‘extra payments’ in the loan repayment schedule. In the loan amortization schedule, an extra payment is always factored in while calculating the loan amount left, and its effect on the monthly EMIs to come is also considered.

· The principal repayment

The ‘principal component’ of the monthly EMI or the amount that gets contributed towards paying the principal amount monthly is also reflected in an EMI amortization schedule. This component increases in number as the years pass by and the ‘interest component’ of the loan repayment schedule decreases in proportion.

· Interest costs

The ‘interest component’ of a loan’s repayment is also mentioned in the EMI amortization schedule. As we mentioned in the previous point, this component decreases in proportion as the years within the loan’s period pass.

Lastly, after making a scheduled monthly payment as part of your loan repayment schedule, if there is any outstanding balance in your name, it will be reflected in the loan repayment schedule. You can easily calculate this figure by subtracting the principal component paid in each period from the current outstanding loan balance. 

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank 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 mentioned. Please consult your financial advisor before making any financial decision.