Loan Amortization Explained
When you borrow money with an installment loan, your repayment schedule is governed by **amortization**—the systematic payoff of principal over time.
What is an Amortization Schedule?
An **amortization schedule** is a complete, line-by-line log showing how every single installment payment splits between interest and principal, along with the declining principal balance after each payment.
Because payments are fixed (equated), but the principal decreases every month, the ratios change dynamically:
- Early Payments: Dominated by interest charges. Very little goes toward principal.
- Late Payments: Dominated by principal payments. Almost no interest is charged.
How an Amortization Schedule is Built
For a loan of **$10,000** at **6%** interest rate for **1 year** (12 payments), your monthly payment is **$860.66**. Here is the step-by-step math for the first two months:
| Month | Payment | Interest | Principal | Balance |
|---|---|---|---|---|
| Month 1 | $860.66 | $50.00 | $810.66 | $9,189.34 |
| Month 2 | $860.66 | $45.95 | $814.71 | $8,374.63 |
How it's calculated:
- Month 1 Interest: $10,000 × (6% / 12) = $50.00
- Month 1 Principal: $860.66 (EMI) - $50.00 (Interest) = $810.66
- Month 1 Remaining Balance: $10,000 - $810.66 = $9,189.34
- Month 2 Interest: $9,189.34 × (6% / 12) = $45.95
- Month 2 Principal: $860.66 (EMI) - $45.95 (Interest) = $814.71
- Month 2 Remaining Balance: $9,189.34 - $814.71 = $8,374.63
Generate a Full Amortization Table
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