How loan amortization works

Amortization is the repayment plan that takes a fixed-rate loan from its starting balance to zero. You pay the same amount every month, but what that payment does changes over time. Early on, a large share goes to interest. Near the end, almost all of it goes to principal. Once you see why, the numbers in an amortization table start to make sense.

The three inputs that set your payment

A standard fixed-rate payment depends on three numbers:

• Loan amount (principal): what you actually borrow, including any fees or add-ons rolled into the loan.
• Interest rate: the annual rate on the loan, divided by 12 to get a monthly rate.
• Term: how many monthly payments you will make.

The standard formula is M = P × r(1 + r)^n ÷ ((1 + r)^n − 1), where P is the principal, r is the monthly rate, and n is the number of months. It finds the one fixed payment that covers each month's interest and still gets the balance to zero on the last scheduled payment. Change any of the three inputs and both the payment and the total interest change.

Why month one is mostly interest

Each month, interest is charged on the balance you still owe. At the start you owe nearly the whole loan, so the interest charge is at its highest. Whatever is left of your payment after interest reduces principal. That makes next month's balance a little smaller, so next month's interest is a little smaller, and a little more of the same payment goes to principal. The shift is slow at first and speeds up over time.

A worked example (illustration only)

These inputs are hypothetical and are not a current market rate: a $25,000 loan at 5.9% for 60 months, with no extra payments.

• Monthly payment: $482.16
• Month 1: $122.92 interest, $359.24 principal, balance $24,640.76
• Month 12: $103.00 interest, $379.16 principal, balance $20,570.59
• Month 36: $55.64 interest, $426.52 principal, balance $10,889.94
• Month 60: $2.36 interest, $479.80 principal, balance $0.00
• Total interest over 60 months: $3,929.51; total paid $28,929.51

The payment never changed, but by the last month nearly all of it went to principal. The $3,929.51 in interest is the cost of spreading $25,000 over five years at that rate. It is not an extra fee. It is simply the rate applied to a balance that goes down over time.

What changes the total interest

Two things change the total most: the rate and the time you take to repay. Using the same hypothetical loan (illustration only):

• Shorter term: at 48 months, the payment rises to $585.98 and total interest falls to $3,127.05.
• Extra principal: keeping the 60-month term but adding $75 a month to principal pays the loan off in 51 payments, and total interest falls to $3,314.48.

Both work the same way: the balance drops faster, so there are fewer months of interest on a large balance. On long loans like a 30-year mortgage the effect is much bigger, because interest keeps building on a large balance for many years. That is why total interest on a 30-year mortgage can be more than the amount borrowed. See what extra principal payments change and 15-year vs. 30-year mortgages.

How to read the schedule on this site

The loan calculator builds a month-by-month table with five columns: month, payment, principal, interest, and remaining balance. Scroll down and you will see the interest column shrink and the principal column grow. The last row should show a zero balance. If you enter an extra monthly payment, the calculator applies it to principal each month and the table gets shorter, so you can see how many payments you would skip.

What amortization does not include

An amortization schedule covers principal and interest only. It does not include property taxes, homeowners insurance, mortgage insurance (PMI), HOA dues, or closing costs. A mortgage bill is often higher for that reason. See why your mortgage bill is higher than this calculator. The schedule also assumes you pay on time every month and the rate never changes. It does not fit interest-only loans, balloon loans, or adjustable-rate loans after the rate resets.

Try it with your own numbers

Pick the calculator that matches your loan: 30-year mortgage, 15-year mortgage, auto loan, or personal loan. Enter the amount, rate, and term from a real offer, and compare the total interest across a few terms before you decide.

FAQ

• Why does my first payment go mostly to interest? Interest is charged on the remaining balance, and the balance is highest at the start. As the balance falls, less of each payment goes to interest.
• Does the monthly payment change on a fixed-rate loan? The principal-and-interest payment stays the same. A mortgage bill that includes escrowed taxes and insurance can still change when those costs change.
• Is a longer term always worse? A longer term lowers the monthly payment but usually raises total interest. Which one fits depends on your budget and goals, and this site does not make that call for you.
• Does this apply to auto and personal loans? Yes, as long as they are fixed-rate installment loans. The same formula applies whatever the loan is for.

Disclaimer

Estimates only. This page is educational and is not financial, lending, legal, or tax advice. Figures come from the numbers you enter and cover principal and interest only. Your actual loan terms depend on the lender, your credit, and costs such as property taxes, homeowners insurance, PMI, and fees. Before you borrow, get a Loan Estimate or other official disclosure from each lender and compare them. MyLoanCalculator.app is not a lender and does not make loan offers.