What is Amortization and How to Pay Off a Loan?
Amortization is the method that shows the breakdown of payments that are necessary to settle a debt. When you apply for a loan, you are usually given the opportunity to view an amortization table so that you know the installments of the payments you must make. Each one is made up of the interest amount of the debt plus the amount of the requested capital.
The purpose of this table is that you can know from the beginning the amount you need to allocate to the total payment of your loan or financing and make the most convenient decision for your business. Next, we will show you an example of the amortization of a loan so you can understand the concept more thoroughly.
Let’s simulate that you requested a credit for your business of 150 thousand pesos that you want to invest in projects that are on the doorstep. The percentage of interest they offer is 28% and a term of 12 months.
The total that you would be paying for your financing would be $ 174,097 pesos, since in this total, both the interest amount of the debt and the capital that you requested is included.
Due to the fact that the loan is destined for working capital, no VAT is charged, since the tax laws of our country establish the non-collection of VAT on the interest paid for amounts received by loans from taxpayers of the type of regime: Moral Person and Physical person with business activity.
In the following image, which contains the respective amortization table to the example we propose, you can see the following:
- Payment dates. Indicate exactly when you must make the payment of money to pay your credit.
- Balance. It shows the amount that remains pending to be settled according to the realization of each payment. That is, what remains of your loan each time you deposit the established monthly payment.
- Minimum payment It refers to the amount of the monthly payment that you must be depositing to pay your credit.
The latter, consists of the amount set by the capital you requested plus the amount set by the interest according to the established rate.
How to achieve a credit settlement?
As shown in the table above, the amount of interest decreases as the payments or payments are made. So, the ideal is that you liquidate your credit in a timely manner, to avoid generating late interest and that the total cost of your credit will increase.
You can devise an extra payment plan that helps you keep in mind the cut-off date as well as the amount you must set aside for it. Within this, you should consider the income and expenses generated by your business in order to manage them correctly and always have enough to pay your debt.
Similarly, by leading your business under strategies that make it grow, you can realize that the return on investment that you made with your credit, will work to increase cash flow and thus have a good financial status.
Remember that the best offer you can accept when applying for a loan is one that suits the ability to pay with which you account.