Business Tips Tricks and Enhancement
When you make a payment on a loan, each payment is divided into two parts:
Part of the payment is for that month’s interest charge.
The remainder of the payment goes toward paying down the principal.
Each month you pay down the loan balance, or principal, by some amount. This means that the next month the interest charge will be less because the charge is calculated as the interest rate multiplied by the balance. The total payment amount is fixed, which means that each succeeding month less of your payment goes toward interest and more toward the principal. To calculate the amount that goes toward principal for a specific payment, use the PPMT function.
To see an example of this, please refer to Figure 3.2. This worksheet presents an amortization table for a $10,000 loan at 5% for 12 months. The three columns of data are
Principal— The amount of each payment that goes toward the loan balance. This is calculated with the PPMT function. You can see that this amount increases for subsequent payments.
Interest— The amount of each payment that goes toward interest. This is calculated with the IPMT function (covered in the next section). You can see that this amount decreases for subsequent payments.
Total— The total monthly payment, the sum of principal and interest. This amount stays constant for the entire term of the loan.
Taken From : Manage Your Money and Investments with Microsoft Excel
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