Chapter 5 Loan Repayment

Amortizing a loan (debt, mortgage) Part of the repayment is used to repay the interest due called interest payments. The excess of the interest due is used repay the original loan (the principal), called principal repayments. The remaining amount of the loan is called the outstanding loan balance.

Amortization schedule A table which shows the interrelationships between the balance, principal payments, and interest payments over the life of a loan.

Sinking fund approach Repay the interest due and the principal separately (the loan amount does not change over the life of the loan): the interest due is repaid regularly during the loan period; the principal is repaid at the end of the loan period by a sinking fund. A fund designed to accumulate a specified amount of money in a specified time by making regular deposits is called a sinking fund.

Equal principal repayments Each repayments (decreasing repayments) involves (1) the level amounts of principal and (2) the interest on the outstanding balance.