Key Takeaways
- Amortization shows exactly how each payment splits between principal and interest
- Early payments are mostly interest; later payments are mostly principal
- Extra payments go directly to principal, saving substantial interest
- A $250,000 loan at 6.5% for 30 years costs $318,861 in interest
- Adding $200/month extra can save $100,000+ in interest
What Is Loan Amortization?
Loan amortization is the process of paying off a loan through regular payments over time. Each payment covers both principal (the original loan amount) and interest (the cost of borrowing). An amortization table shows exactly how each payment is divided and tracks your remaining balance over the life of the loan.
Understanding your amortization schedule is crucial for financial planning because it reveals the true cost of borrowing and helps you see how extra payments can dramatically reduce your total interest paid.
The Amortization Formula
M = P × [r(1+r)n] / [(1+r)n - 1]
How to Use This Calculator
- Enter Loan Amount: The total amount you're borrowing
- Enter Interest Rate: Your annual interest rate (APR)
- Enter Loan Term: How many years to repay the loan
- Optional Extra Payment: Any additional amount you plan to pay monthly
- Click Calculate: View your full amortization schedule
Pro Tip: The Power of Extra Payments
Even small extra payments make a huge difference. On a $300,000 mortgage at 7% for 30 years, paying just $100 extra per month saves over $75,000 in interest and pays off the loan 5 years early. Try different extra payment amounts to see the impact!
Understanding Your Results
Monthly Payment
Your fixed monthly payment amount that includes both principal and interest. This stays the same throughout the loan (excluding extra payments).
Total Interest
The total amount you'll pay in interest over the life of the loan. This is the true cost of borrowing beyond the principal amount.
Amortization Schedule
The detailed table showing each payment broken down into principal and interest portions, plus the remaining balance after each payment.
Why Early Payments Are Mostly Interest
Interest is calculated on the remaining balance. When your balance is highest (at the start), interest charges are highest. As you pay down the balance, more of each payment goes to principal.
For example, on a $250,000 loan at 6.5%:
- First payment: ~$1,354 interest, ~$226 principal
- Payment 180 (year 15): ~$822 interest, ~$758 principal
- Last payment: ~$10 interest, ~$1,570 principal
Practical Applications
- Mortgage Planning: Understand your home loan payments
- Car Loans: See the true cost of auto financing
- Student Loans: Plan your education debt repayment
- Personal Loans: Compare loan offers effectively
- Extra Payment Strategy: Determine optimal extra payment amounts
Frequently Asked Questions
Amortized loans have fixed payments that include both principal and interest, with interest calculated on the remaining balance. Simple interest loans charge interest only on the original principal. Most mortgages, car loans, and personal loans use amortization.
Extra payments go directly to principal, reducing your balance faster. Since interest is calculated on the remaining balance, a lower balance means less interest on every future payment. This compounds over time, potentially saving tens of thousands of dollars.
It depends on your mortgage rate vs. potential investment returns. If your rate is above 5-6%, extra payments provide a guaranteed return. However, if you have higher-interest debt (credit cards), pay that first. Also ensure you have an emergency fund before making extra mortgage payments.
A 15-year mortgage has higher monthly payments but significantly lower total interest (often 50-60% less). You'll also typically get a lower interest rate. However, a 30-year mortgage provides more cash flow flexibility. Use this calculator to compare both scenarios.
This calculator works for standard fixed-rate amortizing loans including mortgages, auto loans, personal loans, and student loans. It may not be accurate for adjustable-rate mortgages (ARMs), interest-only loans, or balloon payment loans.
Additional Resources
For more financial planning tools, explore our complete collection at Calculator Cloud. We offer calculators for mortgages, compound interest, retirement planning, and hundreds more.