Loans & debt
What Is Loan Amortization? Principal and Interest Explained
Loan amortization is the repayment of a loan’s principal through scheduled payments over time, with interest calculated under the loan’s terms.
Also called: Loan amortization.
How it works
For a fully amortizing fixed-rate loan with equal payments, each payment first covers the period’s interest and the remainder reduces principal. As the outstanding balance falls, the interest portion generally falls and the principal portion rises. An amortization schedule shows that split and the remaining balance after each payment. Here the term refers to loans, rather than the accounting treatment of intangible assets.
Period interest = opening balance × period rate; principal repaid = payment − interest
A fully amortizing payment is chosen to clear the balance over the term. At a zero rate, the payment is simply principal divided by the number of payments.
The first payment on a $12,000, two-year loan
Borrow $12,000 at a 6% nominal annual rate with 24 equal monthly payments.
- Monthly rate: 6% / 12 = 0.5%.
- The level monthly payment is approximately $531.85.
- First month’s interest: $12,000 × 0.5% = $60; about $471.85 goes to principal.
The balance after the first payment is about $11,528.15. Later payments have a smaller interest portion as the balance declines.
Monthly end-of-period payments; no fees, insurance, extra payments or rate changes. The calculator carries full precision, so lender schedules using payment-by-payment cent rounding can differ slightly.
Try these example inputsA fixed payment does not mean a fixed principal repayment
The principal-and-interest split changes over the schedule. Mortgage taxes and insurance are separate from that split. A payment below the interest due may increase the balance, called negative amortization; an interest-only loan does not reduce principal during its interest-only period.
Explore with a calculator
- Amortization Calculator
Inspect the principal, interest and remaining balance for each payment.
- Mortgage Calculator
Separate mortgage principal and interest from other ownership costs.
- Loan Calculator
Compare loan terms and payment-frequency assumptions.
Sources and checks
- CFPB: What Is Amortization and How Could It Affect My Auto Loan?
- CFPB: Principal and Interest versus Total Monthly Payment
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
Calculation methodology and review status · All glossary terms