What Is an Amortization Schedule?

Amortization is an accounting term. At the highest level, it means to spread out expenses over time. In business, it means to spread out expenses for assets over time for tax and/or accounting purposes. For banking, it means to pay off a debt, typically a mortgage or car loan, in regular installments by following a fixed payment schedule. An amortization schedule is a table that shows each payment or installment for the life of the loan.

Amortization schedules also show both the principal and interest for each payment. The principal is the amount of the loan that represents the actual money borrowed. Interest is the interest paid on the money borrowed.

Figure 1: A sample amortization schedule from Microsoft Office 365 templates shows both the principal and interest amounts of a loan.

For most amortization schedules, the regular payment is a fixed amount. In Figure 1, the payment amount is the same each month—$525.75—until the final payment.

For many loans, the bulk of the monthly payment goes toward the interest and not the principal. In Figure 2, you can see that the majority of the monthly payment of $1,164.28 is paid toward the interest. And a smaller amount goes toward the principal, especially in the early part of the loan. Later in the life of the loan, the bulk of each payment shifts and is applied to the loan’s principal.

Figure 2: Sample amortization schedule from The Free Dictionary by Farlex, https://financial-dictionary.thefreedictionary.com/amortization+schedule.

The most basic schedule shows the payment date, interest, principal and ending balance. More sophisticated tables, such as shown in Figures 1 and 2, show the beginning balance, total payment and the amount of interest and principal amount from that payment as well as an ending balance. The schedule will show this information for each payment for the life—or tenor—of the loan term. The loan’s tenor is the remaining length of time until the loan is due.

Amortization Schedule: Interest versus Principal

A notable characteristic of a typical amortization schedule is the gradual reduction of the percentage of each payment that goes towards interest and the gradual increase of the percentage that focuses on the principal repayment. Any online amortization calculator will show this shift. Early in the life of most loans, the bulk of the payment is paid toward the interest as is shown in Figure 2. While later in the life of the loan, the bulk of the payment will go toward the principal, also shown in Figure 2.

An amortization table shows you how your loan works. It also helps you see possible outstanding balances or interest costs that might arise in the future. With access to this information, you can make better decisions about your loan and answer questions, such as:

What happens if I repay my loan early?
What will the loan cost me over the life of the loan?
How much less can I pay if I pay more than the monthly amount and specify the extra goes toward the principal?
Is taking out a loan in my best interest?

Amortization Schedule Details and Terms

Here is a breakdown on some of the terminologies found within an amortization table.

1. Scheduled payments or monthly payments

This column within the table details every payment you make or are expected to make each month. Within this payment, a percentage goes towards paying your interest and the rest is used to pay the balance—or principal—of your loan.

2. Interest

Like all loans, interest is charged on the principal you borrow every month. The interest column shows how much of your payment is applied toward the interest of the loan balance. In other words, how much interest you’re paying.

3. Principal

This row shows how much of your payment is applied toward the principal balance of the loan.

4. Cumulative interest and cumulative principal

Some amortization tables include a row that shows the cumulative running total of the amount of interest and principal you pay since the start of the loan with each monthly payment.

If the schedule provided to you by your bank doesn’t includes this table, it’s easy to figure out by adding the interest columns together. You can use paper, a calculator, some online amortization schedule calculators or a spreadsheet program, such as Microsoft Excel.

5. Extra payments

Basic amortization tables don’t include extra payments. However, you can account for extra payments by creating your own table in a spreadsheet program. You can also ask your lender to provide a schedule that shows extra payments, especially extra principal payments, which can positively impact your overall cost of the loan.

6. Other fees

Another thing most amortization schedules don’t show are the additional fees you may need to pay. Fees can include origination fees on a mortgage as well as closing costs. These are typically one-time fees.

With access to an amortization schedule, you can see the full cost of your loan, compare interest rates and see the advantage of making extra payments if possible. From comparing rates to choosing the appropriate tenor for your loan, an amortization schedule can make your search for a loan smarter and more profitable.

A mistake most borrowers make is not considering the amount they’ll pay in interest. Most people focus instead on securing an affordable monthly payment which is only part of the loan picture.

Can Amortization Work for Any Loan?

Amortization schedules work best for loans with the following traits:

A loan for a lump sum
A loan that has a fixed interest rate
A loan that gets paid down over time
A loan with a fixed monthly payment

Examples of loans that have these traits include a fixed-rate mortgage, auto, personal and home equity loans.

This doesn’t mean that you can’t create a loan amortization schedule for other types of loans. Creating one for other types of loans, however, is harder and requires diligent calculations to avoid making mistakes.

Want to know more about loan amortization? See What Is Amorization?