What Is an Amortization Schedule?
How an Amortization Schedule Works
Amortizing loans are a common way that many loans, especially consumer loans such as mortgages and car loans, are structured.
Each periodic payment is the same amount: a portion pays interest and a portion repays the principal. Early in the term of the loan, the interest portion of the payment is large, but as the principal is repaid (as payments are made) that portion decreases.
As the loan approaches maturity, the interest portion of the payment is small. Conversely, early in the loan’s term, the principal payment is relatively small, and it grows as the loan approaches maturity. The last line of the schedule shows the borrower’s total interest and principal payments for the entire loan term. The total principal payments will be the amount originally borrowed. The total interest payments will depend on the interest rate and term of the loan.
Using an amortization schedule, a borrower can see that choosing a shorter amortization period for a mortgage or car loan can help them to save considerably on interest over the life of the loan—on top of owning the asset outright sooner. However, a shorter loan term will mean a larger periodic payment.
Amortization Schedule Example
Mortgage amortization schedules are handy to show when you will reach 20% equity and no longer need to pay for private mortgage insurance. They can also show the real results of putting extra money toward the principal payments.
To calculate a larger loan, use our amortization loan calculator.