How Amortization Works

Paying down a balance over time

Young woman uses calculator to figure out amortization schedule with bike behind her

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Amortization is the process of spreading out a loan (such as a home loan or auto loans) into a series of fixed payments. While each monthly payment remains the same, the payment is made up of parts that change over time. A portion of each payment goes towards interest costs (what your lender gets paid for the loan) and reducing your loan balance (also known as paying off the loan principal).

Your last loan payment will pay off the final amount remaining on your debt. For example, after exactly 30 years (or 360 monthly payments) you’ll pay off a 30-year mortgage. Amortization tables help you understand how a loan works, and they can help you predict your outstanding balance or interest cost at any point in the future.

What Is in an Amortization Table?

An amortization table is a schedule that lists each monthly payment in a loan as well as how much of each payment goes to interest and how much to the principal. Every amortization table contains the same kind of information.

  • Scheduled payments: Your required monthly payments are listed individually by month for the length of the loan.
  • Principal repayment: After you apply the interest charges, the remainder of your payment goes toward paying off your debt.
  • Interest expenses: Out of each scheduled payment, a portion goes toward interest, which is calculated by multiplying your remaining loan balance by your monthly interest rate.

Although your total payment remains equal each period, you'll be paying off the loan's interest and principal in different amounts each month. At the beginning of the loan, interest costs are at their highest. As time goes on, more and more of each payment goes towards your principal and you pay proportionately less in interest each month.

Sample Amortization Table

Sometimes it’s helpful to see the numbers instead of reading about the process. The table below is known as an amortization table (or amortization schedule) and demonstrates how each payment affects the loan, how much you pay in interest, and how much you owe on the loan at any given time. This amortization schedule is for the beginning and end of an auto loan. This is a $20,000 five-year loan charging 5% interest (with monthly payments).

Month Balance (Start) Payment Principal Interest Balance (End)
1 $ 20,000.00 $ 377.42 $ 294.09 $ 83.33 $ 19,705.91
2 $ 19,705.91 $ 377.42 $ 295.32 $ 82.11 $ 19,410.59
3 $ 19,410.59 $ 377.42 $ 296.55 $ 80.88 $ 19,114.04
4 $ 19,114.04 $ 377.42 $ 297.78 $ 79.64 $ 18,816.26
. . . . . . . . . . . . . . . . . . . . . . . .
57 $ 1,494.10 $ 377.42 $ 371.20 $ 6.23 $ 1,122.90
58 $ 1,122.90 $ 377.42 $ 372.75 $ 4.68 $ 750.16
59 $ 750.16 $ 377.42 $ 374.30 $ 3.13 $ 375.86
60 $ 375.86 $ 377.42 $ 374.29 $ 1.57 $ 0
Amortization Table

To see the full schedule or create your own table, use a loan amortization calculator. You can also use an online calculator that creates a table for you, or a spreadsheet to create amortization schedules. Online calculators and spreadsheets are often easiest to work with, and you can often copy and paste the output of an online calculator into a spreadsheet if you prefer not to build the whole model from scratch.

How an Amortization Schedule Helps

Looking at amortization is extremely helpful if you want to understand how borrowing works.

Consumers often make decisions based on an “affordable” monthly payment, but interest costs are a better way to measure the real cost of what you buy. Sometimes a lower monthly payment actually means you’ll pay more in interest, if you stretch out the repayment time, for example.

With the information clearly laid out in an amortization table, it’s easy to evaluate different loan options. You can compare lenders, choose between a 15- or 30-year loan, or decide whether or not to refinance an existing loan. You can even calculate how much you’d save by paying off debt early–you’ll get to skip all of the remaining interest charges on most loans.

Don't assume all loan details are included in a standard amortization schedule. However, some amortization tables show additional details about a loan, including fees such as closing costs, the benefits of additional payments, and cumulative interest, (a running total showing the total interest paid after a certain amount of time).

How to Amortize Loans: Calculations

With an amortizing loan, the payment is based on the amount of the loan, the interest rate, and how many years the loan lasts. Those three ingredients work together to affect how much you pay each month and how much total interest you’ll pay.

Lowering the interest rate can lower your payment, and it helps you save money. Stretching out the loan over a longer period of time will also lower your payment, but you’ll end up paying more in interest over the life of the loan.

Types of Amortizing Loans

There are numerous types of loans available, and they don’t all work the same way. Any installment loan is amortized and you pay the balance down to zero over time with level payments.

  • Auto loans are often five-year (or shorter) amortized loans that you pay down with a fixed monthly payment. Longer loans are available, but you'll spend more on interest, and risk being upside-down on your loan, meaning your loan exceeds your car's resale value if you stretch things out too long to get a lower payment.
  • Home loans are traditionally 15-year or 30-year fixed rate mortgages. Most people don’t keep a loan for that long–they sell the home or refinance the loan at some point–but these loans work as if you were going to keep them for the entire term.
  • Personal loans that you get from a bank, credit union, or online lender are generally amortized loans as well. They often have three-year terms, fixed interest rates, and fixed monthly payments. These loans are often used for small projects or debt consolidation.

Loans That Don't Get Amortized

  • Credit cards are not amortizing loans. You can borrow repeatedly on the same card, and you get to choose how much you’ll repay each month (as long as you meet the minimum payment–but more is better). These types of loans are also known as revolving debt.
  • Interest-only loans don’t amortize either, at least not at the beginning. During the “interest-only period” you’ll only pay down the principal if you make optional additional payments above and beyond the interest cost.
  • Balloon loans require you to make a large principal payment at the end of the loan’s life. During the early years of the loan, you’ll make small payments, but the entire loan comes due eventually. In most cases, you’ll likely refinance the balloon payment, unless you have a large sum of money on hand.

Article Sources

  1. Consumer Financial Protection Bureau. "What Is Negative Amortization?" Accessed April 29, 2020.

  2. Consumer Financial Protection Bureau. "Can I Prepay My Loan at Any Time Without Penalty?" Accessed April 29, 2020.

  3. Colorado State University Extension. "Long-Term Loan Repayment Methods," Page 1. Accessed April 29, 2020.

  4. Prosper. "Prosper Personal Loan Types." Accessed April 29, 2020.

  5. Discover. "Installment Credit vs. Revolving Debt: Which Should You Pay Down First?" Accessed April 29, 2020.

  6. Consumer Financial Protection Bureau. "What Is an Interest-Only Loan?" Accessed April 29, 2020.

  7. Consumer Financial Protection Bureau. "What Is a Balloon Payment? When is One Allowed?" Accessed April 29, 2020.