How to Calculate Loan Amortization (With Schedule Example)
!Loan documents and calculation
When you take a loan, your monthly payment stays the same, but the split between principal and interest changes every month. This is amortization—and understanding it can save you thousands.
In this guide, we'll explain exactly how loan amortization works, create a sample schedule, and show strategies to pay less interest. Use our Amortization Calculator for your specific loan.
What is Loan Amortization?
Amortization is the process of paying off a loan through regular payments that cover both principal and interest. With each payment:
- Interest portion decreases (because you owe less)
- Principal portion increases (accelerating payoff)
- Total payment stays the same
The Amortization Formula
First, calculate the monthly payment:
``
Monthly Payment = P × [r(1+r)^n] / [(1+r)^n - 1]
`
Where:
- P = Principal (loan amount)
- r = Monthly interest rate (annual rate ÷ 12)
- n = Total number of payments
Example Calculation
Loan: ₹50,00,000 home loan Rate: 8% annual (0.667% monthly) Term: 20 years (240 months) `
r = 0.08/12 = 0.00667
n = 240
Payment = 50,00,000 × [0.00667(1.00667)^240] / [(1.00667)^240 - 1]
Payment = 50,00,000 × [0.00667 × 4.926] / [4.926 - 1]
Payment = 50,00,000 × 0.03285 / 3.926
Payment = ₹41,822/month
`
Learn the formula in detail: How to Calculate EMI Manually
Sample Amortization Schedule
For our ₹50,00,000 loan at 8% for 20 years:
First Year Payments
Month Payment Interest Principal Balance 1 ₹41,822 ₹33,333 ₹8,489 ₹49,91,511 2 ₹41,822 ₹33,277 ₹8,545 ₹49,82,966 3 ₹41,822 ₹33,220 ₹8,602 ₹49,74,364 4 ₹41,822 ₹33,162 ₹8,660 ₹49,65,704 5 ₹41,822 ₹33,105 ₹8,717 ₹49,56,987 6 ₹41,822 ₹33,047 ₹8,775 ₹49,48,212 12 ₹41,822 ₹32,636 ₹9,186 ₹48,90,406
Year 1 Summary:
- Total paid: ₹5,01,864
- Interest paid: ₹3,92,222
- Principal paid: ₹1,09,594
- Remaining balance: ₹48,90,406
Middle of Loan (Month 120)
Month Payment Interest Principal Balance 120 ₹41,822 ₹20,082 ₹21,740 ₹29,85,572
At half-way point, principal and interest are nearly equal.
Last Year Payments
Month Payment Interest Principal Balance 235 ₹41,822 ₹1,096 ₹40,726 ₹1,23,595 236 ₹41,822 ₹824 ₹40,998 ₹82,597 237 ₹41,822 ₹551 ₹41,271 ₹41,326 238 ₹41,822 ₹275 ₹41,547 (−₹221)* 239 ₹41,601 ₹0 ₹41,326 ₹0
*Final payment adjusted to exactly pay off remaining balance.
Total Loan Cost
Item Amount Original loan ₹50,00,000 Total payments ₹1,00,37,280 Total interest ₹50,37,280 Interest as % of principal 100.7%
You pay more than double the original loan amount.
How the Split Changes Over Time
Period Interest % Principal % Year 1 78% 22% Year 5 68% 32% Year 10 51% 49% Year 15 29% 71% Year 20 3% 97%
Early payments go mostly to interest—this is why prepayments early in the loan are so powerful.
The Power of Extra Payments
Scenario: Extra ₹5,000/month
Adding just ₹5,000 to monthly payment:
Detail Original With Extra Payment Monthly payment ₹41,822 ₹46,822 Total payments 240 184 Years to payoff 20 15.3 Total interest ₹50,37,280 ₹36,17,152 Interest saved - ₹14,20,128
You save over ₹14 lakh in interest and pay off nearly 5 years early!
One-Time Lump Sum Payment
₹5,00,000 extra payment at end of year 1:
- Original payoff: 20 years
- New payoff: ~17 years
- Interest saved: ~₹8-10 lakh
Prepayment Strategies
Strategy 1: Round Up Payments
If EMI is ₹41,822, pay ₹42,000 or ₹45,000.
Strategy 2: Pay Bi-Weekly
Make half-payment every 2 weeks = 26 half-payments = 13 full payments/year (one extra).
Strategy 3: Lump Sum When Available
Use bonuses, tax refunds, or windfalls for prepayment.
Strategy 4: Increase with Salary
When salary increases 10%, increase EMI by 5%.
Things to Check
- Is there a prepayment penalty?
- What's the minimum prepayment amount?
- Does prepayment reduce tenure or EMI?
Creating Your Own Amortization Schedule
Excel Method
Set up columns: Month, Payment, Interest, Principal, Balance
Interest = Previous Balance × Monthly Rate
Principal = Payment - Interest
New Balance = Previous Balance - Principal
Drag formulas down for all months
Formula for Each Row
Interest for Month n:
`excel
=Balance(n-1) × Monthly_Rate
`
Principal for Month n:
`excel
=Payment - Interest(n)
`
Balance for Month n:
`excel
=Balance(n-1) - Principal(n)
``
Amortization vs. Simple Interest
| Feature | Amortizing Loan | Simple Interest Loan |
|---|---|---|
| Payment structure | Fixed monthly | Varies or balloon |
| Common for | Mortgages, car loans | Personal loans (sometimes) |
| Interest calculation | On remaining balance | On original principal |
| Best for borrower | Usually | Depends on payoff speed |
Frequently Asked Questions
Why is so much of early payments interest?
Because interest is calculated on the outstanding balance. With a large balance, interest is high. As you pay down principal, less interest accrues.
Can I get an amortization schedule from my bank?
Yes, banks are required to provide one. It may be called a "loan statement" or "repayment schedule."
What happens if I make extra payments?
Typically applied to principal (check your agreement). This reduces future interest and either shortens tenure or reduces remaining EMIs.
Is it better to reduce EMI or tenure?
Reducing tenure saves more interest. Reducing EMI improves monthly cash flow. Choose based on your goals.
Related Articles
Advertisement
📚 Suggested Articles
How to Calculate EMI Manually (Formula + Examples)
EMI formula explained with step-by-step examples.
What Happens If You Miss EMI Payment? (Consequences + Solutions)
Understand penalties and how to recover from missed EMI.
Loan Comparison Calculator: How to Choose the Best Loan
Compare different loans by total cost, monthly payment, and APR.