What Is a Loan Amortization Schedule and How to Read One
Learn how to read and understand a loan amortization schedule, including how payments are split between principal and interest over the life of the loan.
An amortization schedule shows exactly how your loan payments are allocated between principal and interest over time. Understanding this table reveals why you pay so much interest early in the loan.
This guide explains how to read an amortization schedule and what it tells you about your loan.
What Amortization Means
Amortization is the process of paying off a loan through regular payments that include both principal (what you borrowed) and interest (cost of borrowing). Each payment chips away at both, but the allocation changes over time.
Front-Loaded Interest
Early payments are mostly interest. As principal decreases, interest charges drop, and more of each payment goes to principal. This is why the first years feel like you are barely making progress.
Sample Amortization Schedule
Here is the first year of a $50,000 loan at 10% for 5 years (monthly payment: $1,062.35):
| Payment # | Payment | Principal | Interest | Balance |
|---|---|---|---|---|
| 1 | $1,062.35 | $645.68 | $416.67 | $49,354.32 |
| 2 | $1,062.35 | $651.06 | $411.29 | $48,703.26 |
| 3 | $1,062.35 | $656.48 | $405.86 | $48,046.78 |
| ... | ... | ... | ... | ... |
| 12 | $1,062.35 | $701.58 | $360.77 | $42,591.02 |
Key Columns Explained
Each column tells you something specific:
- Payment number: Which payment in the sequence (1, 2, 3, etc.)
- Payment amount: Your total payment (usually fixed for amortizing loans)
- Principal portion: Amount reducing your loan balance this payment
- Interest portion: Cost of borrowing charged this payment
- Remaining balance: What you still owe after this payment
How Interest Is Calculated Each Period
Interest for each payment is calculated on the remaining balance:
- Monthly interest rate: Annual rate / 12 (e.g., 10% / 12 = 0.833%)
- Interest charge: Remaining balance x monthly rate
- Example: $49,354 balance x 0.833% = $411 interest
- Principal portion: Total payment minus interest
The Crossover Point
At some point, principal portion exceeds interest portion. This typically happens:
- 5-year loan: Around month 25-30
- 10-year loan: Around year 4-5
- 25-year loan (like mortgages): Around year 12-15
Find Your Crossover
Look through your amortization schedule to find when principal exceeds interest. This psychological milestone shows you are making real progress on the balance.
What Amortization Schedules Reveal
Use your schedule to understand:
- Total interest paid: Sum of all interest payments (often surprising)
- Payoff at any point: Balance column shows what you owe at any payment
- Prepayment impact: Extra payments go entirely to principal
- Equity building: Cumulative principal paid is your equity in financed asset
Prepayment Analysis
Extra payments can dramatically reduce total interest:
| Scenario | Total Interest | Savings |
|---|---|---|
| Normal payments | $13,741 | Baseline |
| +$100/month extra | $10,892 | $2,849 saved |
| +$200/month extra | $8,679 | $5,062 saved |
| Double payments | $6,419 | $7,322 saved |
Check for Prepayment Penalties
Before making extra payments, confirm your loan allows prepayment without penalty. Some loans charge fees or require you to pay all remaining interest regardless of early payoff.
Interest-Only vs. Fully Amortizing
Not all loans amortize. Compare structures:
| Structure | How It Works | Best For |
|---|---|---|
| Fully amortizing | Each payment reduces principal | Standard term loans |
| Interest-only period | Initial payments cover only interest | Real estate, business growth |
| Balloon payment | Small payments, large final payment | Bridge financing |
| Negative amortization | Balance can increase | Avoid these - high risk |
How to Get Your Amortization Schedule
Request or generate your schedule:
- From your lender: Request the full schedule before signing
- Online calculators: Many free tools generate schedules
- Spreadsheet: Excel/Google Sheets have built-in amortization functions
- Loan software: QuickBooks and similar tools can generate schedules
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