The relevance of the amortization process- When a person goes for a car loan, he knows that this amount is to be paid by a predefined number of installments known as EMIs, but what amazes the most is the actual payment which is to be made as actual EMIs remains unknown.
Whenever one takes a Car Loan and begins paying the EMIs, it is informative to know that EMI paid every month is allocated towards servicing the principal and an interest component of the loan. This division of the total amount into principal and interest components is called the amortization process. The exact calculation process and the implication of this calculation are not known to many car loan borrowers.
The Parameters Needed to know The relevance of the Amortization Process
To calculate the payment of monthly installment, certain parameters to be taken into account are:
1) Total Loan Amount
2) Tenure of Loan
3) EMI amount
4) Number of Installment paid
Importance and The relevance of the Amortization Process
Any car loan borrower should know the calculation done for the amortization process since it makes an individual aware of the status of the loan. The information it provides :
1) The outstanding loan amount
2) The separation between the principal and interest elements on the outstanding amount that has to be paid.
3) The separation between the principal and interest out of the cumulative amount that has been repaid to date.
4) This provides a great insight as to when the loan will get over as per the current schedule of repayment.
The necessity of Amortization Schedule
If a car loan borrower prepares a proper amortization schedule, it will help him gain the benefits of the segregation between principal and interest. The several benefits are:
1) This schedule indicates the current status of the loan account giving an analysis of the amount and time left.
2) The summary also helps the borrower to determine whether it is a good idea to repay the car loan in between or continue with the pre-decided EMI until the actual tenure of the loan.
3)The schedule provides insight into whether prepaying the car loan is within your limits or not.
(Note: The initial EMIs have a high rate of interest and then it reduces as the repayment progresses. The principal element, on the other hand, increases progressively. When one prepays it is the principal amount is paid back to the lender)
There exist many online EMI Calculator to assist you in preparing the amortization schedule.
Thus knowing the accurate situation of the remaining car loan can benefit you to make an intelligent decision regarding the prepayment of the existing car loan.