What Is an Amortization Schedule?
An amortization schedule is a chart that shows the amount of each payment that goes toward principal and interest. For an amortizing loan, each monthly payment is split between interest and principal, and at the beginning of the loan term, a greater percentage of the payment goes toward interest than toward principal.
In a fixed-rate amortizing loan, the principal balance decreases slowly at first and then more quickly closer to the end of the loan term. This happens because the interest portion of each payment is calculated on the remaining balance, so as the balance drops, more of the fixed payment can be applied to principal.
Sources: Consumer Financial Protection Bureau
How to Read an Amortization Table
An amortization table lists each scheduled payment by period (usually monthly) and shows the payment amount, the interest portion, the principal portion, and the remaining balance after that payment. In a typical fixed-rate mortgage, the combined principal and interest payment remains constant over the life of the loan, but the amounts allocated to principal and interest change each month.
To read the table, look at the first row: the interest portion is high, the principal portion is low, and the balance drops only slightly. As you move down the rows, the interest portion decreases, the principal portion increases, and the balance declines faster. The last row typically shows a final payment that covers the remaining principal and interest, so the balance reaches zero at the end of the term.
Sources: Consumer Financial Protection Bureau
Sample Schedule for a $20,000 Auto Loan at 5% for 5 Years
The table below illustrates the general shape of an amortization schedule for a $20,000 auto loan with a 5% annual interest rate and a 5-year term. The payment formula used by lenders allows for just the right amount to go to interest and principal to pay off the loan precisely at the end of the term. The exact payment amount depends on the interest calculation method and the number of payments per year, but the pattern shown here is typical for a fixed-rate, monthly-payment amortizing loan.
This table uses a simplified annual rate of 5% and assumes monthly compounding. The monthly payment is approximately $377.42, which is derived from the standard formula. Note that the actual payment may vary slightly depending on the lender's rounding conventions.
| Month | Payment | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | $377.42 | $83.33 | $294.09 | $19,705.91 |
| 2 | $377.42 | $82.11 | $295.31 | $19,410.60 |
| 3 | $377.42 | $80.88 | $296.54 | $19,114.06 |
| 12 | $377.42 | $69.50 | $307.92 | $16,362.71 |
| 24 | $377.42 | $53.76 | $323.66 | $12,570.18 |
| 36 | $377.42 | $36.72 | $340.70 | $8,395.72 |
| 48 | $377.42 | $18.16 | $359.26 | $4,089.19 |
| 60 | $377.42 | $0.83 | $376.59 | $0.00 |
Sources: Consumer Financial Protection Bureau
How Much Interest Is Paid in Early vs. Later Years
In the early years of a loan, most of the monthly payment goes to interest because the loan balance is still high. As the principal is paid down, the interest portion decreases and more of the payment goes to principal. This pattern is a direct result of the declining balance.
Because the balance shrinks over time, the interest charged each month is lower, freeing up more of the same payment to reduce principal. This is why the principal balance falls slowly at first and accelerates toward the end of the term.
Sources: Consumer Financial Protection Bureau
Changing the Loan Term on the Schedule
The length of the loan term has a direct effect on monthly payments and total interest. A longer term reduces the monthly payment because the loan is spread over more payments, but it increases the total interest paid over the life of the loan. Conversely, a shorter term raises the monthly payment but lowers the total interest.
A 7-year loan would have a lower monthly payment, but the interest would accrue over more payments, leading to higher total interest. The amortization schedule for a shorter term would show a faster build-up of principal and a quicker decline in the balance.
Sources: Consumer Financial Protection Bureau
Limitations: What Amortization Schedules Don't Show
An amortization schedule typically shows only the principal and interest components of each payment. It does not include other costs that may be part of your monthly payment, such as property taxes, homeowners insurance, mortgage insurance, or other escrow items. These fees are separate from the loan's interest and principal, and they can change over time. To see the full monthly obligation, you need to add those costs to the principal and interest payment.
Additionally, the schedule assumes that you make every payment on time and do not pay extra. If you make extra payments, your actual amortization will differ from the original schedule, because the extra amount goes directly to principal, reducing the balance faster and shortening the term. The schedule also does not account for any fees or prepayment penalties that might be in your loan agreement.
Sources: Consumer Financial Protection Bureau
Frequently asked questions
Why is interest higher in the first years of the loan?
Because the loan balance is still high, and interest is calculated on the remaining balance. In the early years, you owe more interest, so most of your monthly payment is applied to interest. As you pay down the principal, you owe less interest each month, and more of your payment goes to principal.
Sources: Consumer Financial Protection BureauDoes my amortization schedule change if I make extra payments?
An extra payment reduces your principal balance more quickly. After an extra payment, your remaining balance is lower, so the interest calculated on the next payment is lower. This means more of your regular payment goes to principal, and the loan will be paid off earlier than the original schedule. Your lender can provide an updated schedule or you can recalculate it based on the new balance.
How do I calculate the total interest from the schedule?
Add up the interest portions for every payment on the schedule. This is the sum of the interest amounts shown in each row. You can also find the total interest by subtracting the original loan amount from the total of all payments.
Is the schedule the same for simple interest and precomputed loans?
No, they differ. Simple-interest loans calculate interest on the daily outstanding balance, so the schedule can vary if you pay early or late. Precomputed loans (also called add-on interest) calculate interest in advance and may not reduce the interest due if you prepay. For a standard amortizing loan, the schedule shows equal payments and predictable interest, but the underlying computation method affects how prepayments are applied. Check your loan documents to understand which method applies to your loan.
Sources: Consumer Financial Protection BureauWhy does the final payment differ from the others?
The fixed monthly payment is calculated to amortize the loan exactly, but rounding of interest and principal amounts can cause the last payment to be slightly different. The lender adjusts the final payment to ensure the balance reaches zero.
Sources
- What is amortization and how could it affect my auto loan? — Consumer Financial Protection Bureau
- How does paying down a mortgage work? — Consumer Financial Protection Bureau
- § 1026.22 Determination of annual percentage rate. — Consumer Financial Protection Bureau