Most business loan interest rates for SMEs fall within 9% to 11% p.a. effective rate. This is calculated on monthly reducing balance basis. It is important for a SME owner to know about the amortization payment schedule used in commercial loan financing.

Almost all SME loans in Singapore are calculated using the amortization payment schedule. Most commercial loan companies and banks will apply amortization on the loan extended to you but most never explain in detail how the loan is amortized.

An amortization schedule is a table showing the periodic payments of an amortizing commercial business loan. These periodic payments are calculated with the help of amortization calculator. Before we discuss further on the amortization payment schedule and how it works, it is important to understand few related terms and concepts.

Amortization is referred to the process of paying off the loan plus interest over time through regular equal payments. These payments are usually made on a monthly basis. Usually, the monthly payment made goes towards two different directions:

- Interest paid on the principal for the particular month.
- Remaining goes to the loan principal amount.

In amortization, towards the starting of the loan, the interest costs are the highest. Therefore, in the initial months, the maximum amount is paid towards the interest, and only a small amount is paid towards the loan amount.

However, as the time passes by, a major portion of the payment goes towards the principal and interest keeps on reducing each month (refer Table 1). These loans are designed in such a way that after a specific point of time the last loan payment would be enough to the pay off the loan balance.

**Commercial Loan Effective Interest Rate (EIR)**

EIR is the name given to the interest rate that has to be paid on loan. Effective interest rate is calculated by reducing balance over a given period of time, and is also known as effective rate, or annual equivalent rate.

**Equated Monthly Installment** (**EMI)**

EMI is the regular payment (daily, or monthly, or annually) that has to be made against the business loan. The EMI is inclusive of the interest payable for the monthly outstanding loan amount along with the principal repayment. This is calculated using **EMI = A / D, where: **Discount Factor (**D**) = {[(1 + i) ^n] – 1} / [i(1 + i)^n; Number of Periodic Payments (**n**) = Payments per year times number of years; Periodic Interest Rate (**i**) = Annual rate divided by the number of payments per**; **and A is the loan amount**.**

Once the EMI is paid for that particular month, the outstanding amount would be reduced by that much amount. The interest for the next month would be calculated on the remaining balance, and not the principal towards the start.

**Rest**

The term ‘rest’ commonly used when quoting commercial loan rates does not suggest literally a period of rest and interest free. It is simply used to denote the time frame at which the principal amount would come down as the borrower pays the loan. The term refers to the frequency at which the outstanding principal is calculated, and the interest on it is calculated. Usually for commercial lending, there are four categories based on the interest Rest.

**Daily Rest – **Interest is calculated on the basis of outstanding balance from the previous day. In this method, the outstanding principal is accessed on a daily basis, and the interest burden is reduced on the very next day of the payment made. The other term for this is daily reducing balance loan.

**Monthly Rest – **The outstanding payment in this method is calculated on a monthly basis.

**Quarterly Rest- **The outstanding payment in this method is calculated on a Quarterly basis.

**Annual Rest- **The outstanding payment in this method is calculated on an annual basis.

Typically, commercial bank loans for small businesses are calculated on monthly rest basis for ease of calculation.

The above terms and how the amortization works will get clear with the help of the example below (also refer to Table 1):

Loan Amt = | 100,000 | ||

Int. Rate On Monthly Rest Basis = | 6.75% | p.a. | |

Tenor = | 48 | months | |

Monthly Installment (M.I.)= | $2,383.04 |

In this case, the monthly installment (EMI) comes at $2,383.04. This is calculated using **P = A / D formula discussed above.**

Since, it is on monthly rest basis, so the interest will be calculated monthly. Thus, interest paid for the first month will be calculated as: ($100,000*6.75%)/ (100*12) = $562.50 (I” portion of M.I). From the EMI of **$2,383.04, **if we deduct this interest, we get the amount adjusted towards the principal or the “P” portion of M.I. ($2,383.04 – $562.50 = $1820.54).

To get the O/S Principal for next month, we will have to subtract the amount adjusted towards the principal or the “P” portion of M.I. from the Principal amount of last month. Thus, for the second month outstanding Principal will be $100,000 -$1820.54 = $98179.46

Now, interest for the second month will be calculated on this Principal amount = 98179.46*6.75%*/12*100 = $552. To get the amount adjusted towards the principal or the “P” portion of M.I., we now subtract this interest from the M.I. (($2,383.04 – $552.50 = $1830.78).

For all other months, up to the end of the tenure (48 months) the calculation is to be done similarly.

Most common type of amortized loan is commercial business loan, property loan and personal loan. On the other hand, loans that cannot be amortized are credit cards, interest servicing only loans and balloon Loans. Motor vehicle loan is also less common to be amortized in Singapore.

Understanding amortization is very important as it helps in understanding the mechanism of deriving commercial business loan interest rates. Further, it is also useful in knowing how to get a commercial loan and choosing the appropriate financing product when there are various offerings.

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No. of months | O/S Principal | “I” portion of M.I. | “P” portion of M.I. | |

1 | $100,000.00 | $562.50 | $1,820.54 | |

2 | $98,179.46 | $552.26 | $1,830.78 | |

3 | $96,348.67 | $541.96 | $1,841.08 | |

4 | $94,507.59 | $531.61 | $1,851.44 | |

5 | $92,656.15 | $521.19 | $1,861.85 | |

6 | $90,794.30 | $510.72 | $1,872.32 | |

7 | $88,921.98 | $500.19 | $1,882.86 | |

8 | $87,039.12 | $489.60 | $1,893.45 | |

9 | $85,145.67 | $478.94 | $1,904.10 | |

10 | $83,241.58 | $468.23 | $1,914.81 | |

11 | $81,326.77 | $457.46 | $1,925.58 | |

12 | $79,401.19 | $446.63 | $1,936.41 | |

13 | $77,464.78 | $435.74 | $1,947.30 | |

14 | $75,517.47 | $424.79 | $1,958.26 | |

15 | $73,559.21 | $413.77 | $1,969.27 | |

16 | $71,589.94 | $402.69 | $1,980.35 | |

17 | $69,609.59 | $391.55 | $1,991.49 | |

18 | $67,618.10 | $380.35 | $2,002.69 | |

19 | $65,615.41 | $369.09 | $2,013.96 | |

20 | $63,601.46 | $357.76 | $2,025.28 | |

21 | $61,576.17 | $346.37 | $2,036.68 | |

22 | $59,539.50 | $334.91 | $2,048.13 | |

23 | $57,491.36 | $323.39 | $2,059.65 | |

24 | $55,431.71 | $311.80 | $2,071.24 | |

25 | $53,360.47 | $300.15 | $2,082.89 | |

26 | $51,277.58 | $288.44 | $2,094.61 | |

27 | $49,182.97 | $276.65 | $2,106.39 | |

28 | $47,076.58 | $264.81 | $2,118.24 | |

29 | $44,958.35 | $252.89 | $2,130.15 | |

30 | $42,828.20 | $240.91 | $2,142.13 | |

31 | $40,686.06 | $228.86 | $2,154.18 | |

32 | $38,531.88 | $216.74 | $2,166.30 | |

33 | $36,365.58 | $204.56 | $2,178.49 | |

34 | $34,187.09 | $192.30 | $2,190.74 | |

35 | $31,996.35 | $179.98 | $2,203.06 | |

36 | $29,793.29 | $167.59 | $2,215.46 | |

37 | $27,577.83 | $155.13 | $2,227.92 | |

38 | $25,349.91 | $142.59 | $2,240.45 | |

39 | $23,109.46 | $129.99 | $2,253.05 | |

40 | $20,856.41 | $117.32 | $2,265.73 | |

41 | $18,590.69 | $104.57 | $2,278.47 | |

42 | $16,312.22 | $91.76 | $2,291.29 | |

43 | $14,020.93 | $78.87 | $2,304.18 | |

44 | $11,716.75 | $65.91 | $2,317.14 | |

45 | $9,399.62 | $52.87 | $2,330.17 | |

46 | $7,069.45 | $39.77 | $2,343.28 | |

47 | $4,726.17 | $26.58 | $2,356.46 | |

48 | $2,369.71 | $13.33 | $2,369.71 | |

49 | $0.00 | $0.00 | $2,383.04 |

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