How Loan Amortization Works: Schedule, Formula, Examples
Loan amortization splits each payment between interest and principal. See a full worked schedule, the payment formula, and how extra payments change it.
By Awais, Founder and editor-in-chiefPublished
An amortizing loan has the same payment every month, but what that payment pays for changes. Each month, interest is charged on the balance you still owe. Your payment covers that interest first, and whatever is left reduces the balance. Because the balance falls, next month’s interest is a little smaller and a little more goes to principal. The loan reaches exactly zero on the last payment.
Car loans, personal loans, student loans and most fixed-rate mortgages work this way. The amortization calculator builds the full month-by-month schedule for any loan.
The payment formula
P = amount borrowed, r = annual rate ÷ 12, n = number of monthly payments
Each month:
Principal = M − interest
New balance = balance − principal
That’s all amortization is. The rest of this guide shows what it looks like with real numbers.
Worked example: a $20,000 loan at 7% for 5 years
- P = $20,000
- r = 0.07 ÷ 12 = 0.005833
- n = 60
The payment is $396.02 a month.
The first three months
| Month | Payment | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | $396.02 | $116.67 | $279.36 | $19,720.64 |
| 2 | $396.02 | $115.04 | $280.99 | $19,439.66 |
| 3 | $396.02 | $113.40 | $282.63 | $19,157.03 |
Month 1’s interest is $20,000 × 0.005833 = $116.67. The remaining $279.36 reduces the balance. In month 2 the interest is charged on the lower balance, so it falls to $115.04 and the principal share rises.
Year by year
| Year | Interest paid | Principal paid | Balance at year end |
|---|---|---|---|
| 1 | $1,290.33 | $3,461.96 | $16,538.04 |
| 2 | $1,040.06 | $3,712.22 | $12,825.82 |
| 3 | $771.71 | $3,980.58 | $8,845.23 |
| 4 | $483.95 | $4,268.34 | $4,576.90 |
| 5 | $175.39 | $4,576.90 | $0.00 |
| Total | $3,761.44 | $20,000.00 |
You pay the same $4,752 each year, but the interest falls from $1,290 in year one to $175 in year five. The very last payment is $2.30 of interest and $393.73 of principal.
Why long loans are so interest-heavy at the start
The longer the loan, the smaller the share of the early payments that goes to principal. Take a $300,000 mortgage at 6.5% for 30 years. The payment is $1,896.20 (principal and interest only).
| Payment number | Interest | Principal | Balance after |
|---|---|---|---|
| 1 | $1,625.00 | $271.20 | $299,728.80 |
| 60 (year 5) | $1,523.20 | $373.01 | $280,832.93 |
| 120 (year 10) | $1,380.41 | $515.80 | $254,328.38 |
| 180 (year 15) | $1,182.95 | $713.25 | $217,677.42 |
| 240 (year 20) | $909.90 | $986.30 | $166,995.85 |
| 300 (year 25) | $532.33 | $1,363.87 | $96,912.49 |
| 360 (year 30) | $10.22 | $1,885.99 | $0.00 |
Three things stand out:
- In month 1, 86% of the payment is interest.
- Principal doesn’t overtake interest until payment 233, in year 20.
- After 15 years of payments, you still owe $217,677, more than 72% of the original loan. Half the loan isn’t repaid until payment 257.
Over 30 years you pay $382,633 in interest, more than the amount borrowed. The same loan over 15 years costs $2,613.32 a month but only $170,398 in interest. Our guide to 15- vs 30-year mortgages compares the two in detail.
This front-loading isn’t a trick by the lender. Interest is always charged on what you still owe, and early on you owe almost everything.
What extra payments do
An extra payment goes straight to principal (make sure your lender applies it that way). Since every later month’s interest is charged on a lower balance, the saving compounds.
On the $20,000 car loan above, paying $100 extra a month from the start:
| Normal schedule | With $100 extra | |
|---|---|---|
| Monthly payment | $396.02 | $496.02 |
| Months to pay off | 60 | 47 |
| Total interest | $3,761 | $2,868 |
You save about $894 and finish 13 months early. Extra payments made early in the loan save the most, because that’s when the balance and the interest are highest. For mortgages, our guide on how extra payments shorten your mortgage runs the numbers.
Before you overpay, check:
- Prepayment penalties. Some personal loans and mortgages charge a fee for paying early. Your loan agreement will say.
- Higher-rate debts. Extra money usually does more on a 24% credit card than on a 7% car loan.
- Emergency savings. Money paid into a loan is hard to get back out.
Amortizing vs other loan types
| Loan type | How it repays |
|---|---|
| Amortizing (car, personal, fixed mortgage) | Equal payments; interest falls and principal rises each month |
| Interest-only | Only interest for a set period; the balance doesn’t fall until later |
| Flat-rate (common for some personal and car loans in South Asia) | Interest is calculated on the original amount for the whole term, so the real rate is much higher than it looks |
| Credit card (revolving) | No fixed schedule; a minimum payment that shrinks as the balance shrinks |
| Balloon | Small payments for years, then a large lump sum at the end |
If a lender quotes a “flat” rate, convert it to the reducing-balance rate before comparing. Our guide on how EMI is calculated shows how.
How to read your own amortization schedule
- Find the current row. Your latest statement shows the balance; find the matching month.
- Note the interest share. It tells you how much an extra payment this month would save.
- Check the payoff date against your plans. If you might sell a home in seven years, see what you’d still owe then.
- For mortgages, remember escrow. Your actual payment may include property tax and insurance on top of principal and interest, and that part changes from year to year. The schedule only covers the loan itself.
The loan calculator gives the payment and total cost for any amount, rate and term, and the mortgage calculator adds tax, insurance and PMI. For quick definitions of APR, principal, escrow and other loan terms, see the finance glossary.
FAQ
Why does most of my early payment go to interest?
Interest is charged on the balance you owe, and at the start you owe nearly the full amount. As the balance falls, so does the interest, and more of each payment goes to principal.
Does paying extra reduce my monthly payment?
Usually not. On most loans the payment stays the same and the loan ends sooner. Some lenders let you “recast” a mortgage after a big lump sum to lower the payment instead, often for a fee.
What does “fully amortizing” mean?
It means the regular payments repay the whole loan, interest and principal, by the end of the term, with no lump sum left over.
Is it better to pay extra early or late in a loan?
Early. The same extra dollar saves more interest when it’s paid at the start, because it removes principal that would otherwise be charged interest for the most months.
Sources
- CFPB: What is amortization and how could it affect my auto loan?
- CFPB: What is a prepayment penalty?
All schedule figures are calculated with the standard amortization formula above, rounded to the cent.