Applying for a loan can be a daunting task for a consumer. Everyone worries about the prime lending rate, loan terms and such. So it is important to know a little about how these things are calculated.

An amortization table is exactly what you need to look at before you take out any loan. Ask your lender to show you one prior to the signing.

An amortization schedule is a report that spells out in detail the effects of each payment on a loan throughout the life of that loan. This is typical of a mortgage loan since they are long term at 25 to 40 years, but can be used on any type of loan. Car loans, personal loans and student loans can all be reviewed using an amortization schedule.

Every loan is split into two pieces: the principal (what you are borrowing) and the interest (what you pay for the loan). An amortization table breaks down each payment and tells you how much of your payment is going to interest and how much goes towards paying down the principal.

At the beginning of the loan, a large part of the payment goes towards interest with very little going to the principal pay down. The amount going to the principal increases as the term progress Usually, the final payment is somewhat lower than the previous ones.

Additionally, the amortization chart shows interest paid to date, principal paid to date and principal remaining after each payment.

As you can already see, this is a valuable tool for the savvy consumer to properly decide on the right loan deal.

The formula is very involved and looks like this where P=Payment, I=interest and n=number of payments:

P= I x principal x (1+I) x n / (1 + I) x n

You could try that for your self or just use one of the many free amortization calculators like the one at http://www.amortization-calc.com/.

Aside from getting this information from a lender, there are quite a few companies that sell amortization software like Slateboard’s Quick Calc Pro Amortization software. See it at http://www.slateboard.com/pro_quikcalcpro.htm

With the software in hand, you could easily preview the financial impact of any loan you are considering. Look for the best rate, put it into the calculator and figure exactly what the payments will be for a given term.

This is especially useful when considering a re-finance or re-mortgaging. What happens is that all of the interest paid on the original loan is lost. The re-finance stars the process all over again.

There are also several different types of amortization schedules including linear, declining balance, annuity, bullet (all at one time) and increasing balance (negative amortization). Of these, the most common one is linear.

Almost any financial web site has calculators available freely. Simply Google “amortization calculators” and you will see a plethora of free ones to choose from. Software like that mentioned above is also available openly either at your favorite software store or online. Again, just Google “amortization software”.

A little knowledge goes a long way and using an amortization schedule is good preparation and even better foreknowledge.