What Is Amortization?
Amortization is the process of paying off a loan through regular fixed payments over a set period. Each payment covers accrued interest first, with the remainder reducing the principal balance. Early payments are mostly interest; later payments are mostly principal.
The Amortization Formula
M = P × [r(1+r)ⁿ] / [(1+r)ⁿ − 1]
- M = Monthly payment
- P = Principal (loan amount)
- r = Monthly interest rate (APR ÷ 12)
- n = Total number of payments (years × 12)
Example: $20,000 loan at 11% APR over 60 months → M = $434.85/month. Total paid: $26,090.91 — of which $6,090.91 is interest.
Sample Amortization Schedule
$20,000 at 11% APR — 60 months — key months shown
| Month | Payment | Principal | Interest | Balance |
|---|---|---|---|---|
| 1 | $434.85 | $251.52 | $183.33 | $19,748 |
| 2 | $434.85 | $253.82 | $181.03 | $19,495 |
| 3 | $434.85 | $256.15 | $178.70 | $19,239 |
| 12 | $434.85 | $278.07 | $156.78 | $16,825 |
| 24 | $434.85 | $310.25 | $124.60 | $13,282 |
| 36 | $434.85 | $346.15 | $88.70 | $9,330 |
| 48 | $434.85 | $386.21 | $48.64 | $4,920 |
| 60 | $434.85 | $430.90 | $3.95 | $0 |
Key Takeaways
- → Your monthly payment stays the same throughout the loan term.
- → Early payments are mostly interest; later payments are mostly principal.
- → Making extra principal payments accelerates amortization and cuts total interest.
- → Refinancing to a lower rate restarts amortization on the new balance.