As you saw on the previous page, a payment/amortization schedule can be vital when you have a long-term loan to pay back. The schedules are not created at random; certain factors go into determining someone's payment schedule, and they are:

Now, there are 5 steps you must follow to calculate a payment schedule:

Step 1

1. Start in the first month of the loan and multiply the interest rate with the principal balance.

Step 2

2. For loans with a monthly repayment schedule, divide the result obtained from Step 1 by 12 to determine the monthly interest.

Step 3

3. Subtract the interest obtained in Step 2 from the total monthly payment. This difference is what will be the principal for that month.

Step 4

4. Finally, subtract the amount obtained from Step 3, the principal for the current month, from the principal balance to get a new principal balance for the next month.

Step 5

5. For the next month, and beyond, repeat Steps 1 through 4, but use the remaining balance from each previous month (rather than the initial principal).

After following these steps repeatedly for each month that the loan must be paid back, by the end of the payment schedule, your balance should be at $0.

Now, let's look at an example showing the steps to calculate a payment schedule in action.

In order to determine how much she will pay the first month, she multiplies the principal balance, which in this case is $7,000 (since she initially paid $3,000), by the interest rate of 7.5%. Recall that to convert a percentage to a decimal, divide it by 100. So, 7.5% equals 0.075.

7,000 \( \times \) 0.075 = 525.

Next, since she pays an installment every month, divide this result by 12 to determine how much she will be paying in interest that first month:

525 ÷ 12 = $43.75

Next, subtract this interest fee from the total monthly payment (which in this case is $607.00):

607.00 − 43.75 = 563.25

So, her new principal will be $563.25, and after the first month, her remaining balance to pay on the car loan will be $7,000 − $563.25 = $6,436.75.

For the second month, she now multiplies the interest rate with the new principal balance:

6436.75 \( \times \) 0.075 = 482.76

Next, she divides this result by 12 months to get the interest payment for the month:

482.76 ÷ 12 = $40.23

Then she subtracts this amount from her monthly payment of $607.00:

607.00 − 40.23 = $566.77

So, her new principal, for the second month will now be $566.77. Meanwhile, after the second month, her remaining balance to pay on the car loan will be $6,436.75 − $566.77 = $5,869.98.

So, her payment schedule, for the first two months, will look like this:

Payment Date	Payment	Interest	Principal	Balance
February	$607.00	$43.75	$563.25	$6,436.75
March	$607.00	$40.23	$566.77	$5,869.98

In order to finish the table, she will have to follow the steps again until her balance is $0, which, if done correctly, will occur after calculating the final month on her loan term.

Turn it in!