What Is an Amortization Schedule? Formula and How to Calculate It

Search Fintrev

Search our guides, reviews and glossary.

An amortization schedule is a table that shows how a loan balance, or the recorded value of an intangible asset, falls over time. For a loan, each row is one payment, split into the part that pays interest and the part that reduces principal, with the remaining balance after that payment. For an intangible asset such as a patent, each row shows the portion of the asset’s cost expensed in that period and the book value left over. In both cases the schedule turns one large amount into a series of planned reductions over a fixed period.

How a loan amortization schedule works

Every amortizing loan has the same three moving parts: the principal (the unpaid balance, excluding interest and fees), the interest rate, and the number of payments. From those three inputs the lender sets a payment large enough to cover each period’s interest and still retire the balance by the final payment.

Interest is charged on what you still owe. When the balance is at its highest, at the start, interest takes the largest bite of the payment. Each payment reduces the balance a little, which lowers the next period’s interest, which leaves more of the next payment for principal. The process compounds in the borrower’s favor: the principal portion accelerates toward the end of the loan, even though the payment amount never changes.

A typical loan amortization table has these columns:

The ending balance of one row becomes the beginning balance of the next. If the math is right, the final row ends at zero (sometimes off by a few cents, which lenders absorb in the last payment).

Amortization formula: how to calculate the payment and the split

Monthly payment formula

Given the loan amount, rate and term, the fixed payment is:

Payment = P × [ i × (1 + i)^n ] / [ (1 + i)^n − 1 ]

where:

• P = loan amount (principal)
• i = periodic interest rate (the annual rate divided by the number of payments per year; for monthly payments, annual rate ÷ 12)
• n = total number of payments (years × 12 for monthly payments)

Two conversions trip people up. A 3% annual rate becomes 0.0025 per month (0.03 ÷ 12), not 0.03. A four-year loan becomes 48 payments, not 4. This formula assumes a fixed rate, equal payments, and interest calculated once per payment period on the outstanding balance.

Interest and principal in any period

Each row of the schedule then uses two steps:

Interest = Outstanding balance × (Annual rate ÷ 12)

Principal = Total payment − Interest

Subtract the principal from the balance, carry the new balance to the next row, and repeat; a spreadsheet just runs this loop n times. In Excel or Google Sheets, the functions PMT, IPMT and PPMT return the payment, the interest portion and the principal portion for a given period, which makes it easy to check a lender’s figures.

The rate in these formulas is the note’s interest rate, not the APR, which folds certain fees into an annualized cost figure and would overstate the interest line on the schedule.

Example: a $30,000 car loan

Take a hypothetical $30,000 auto loan at 3% annual interest, repaid monthly over four years.

• i = 0.03 ÷ 12 = 0.0025
• n = 4 × 12 = 48
• Payment = $30,000 × [0.0025 × 1.0025^48] / [1.0025^48 − 1] ≈ $664.03

Month 1: interest is $30,000 × 0.0025 = $75.00, so principal is $664.03 − $75.00 = $589.03 and the new balance is $29,410.97. Repeating the steps gives the first rows of the schedule:

By the final payment, interest is only about $1.66, because almost nothing is left to charge interest on. Over 48 payments the borrower pays roughly $31,873, of which about $1,873 is interest.

Example: a 30-year mortgage amortization schedule

Longer terms magnify the front-loading. Consider a hypothetical $300,000 home loan at 6% fixed for 30 years.

• i = 0.06 ÷ 12 = 0.005
• n = 360
• Payment ≈ $1,798.65 (principal and interest only)

In month 1, interest is $300,000 × 0.005 = $1,500.00, so only $298.65 of the payment reduces principal. More than 83% of the first payment goes to interest. Over the full 360 payments the borrower pays about $647,500, so total interest comes to roughly $347,500, more than the original loan.

This is why a mortgage amortization schedule matters for decisions such as refinancing or selling early. After 10 years of payments on this loan, the remaining balance is still about $251,000, meaning only around $49,000 of principal has been repaid despite roughly $216,000 in total payments. A borrower who expects to sell in a few years builds equity mainly through the down payment and any price appreciation, not through early principal payments.

Amortization period vs. loan term

The two are related but not the same. The amortization period is the timeline used to calculate the payment. The loan term is how long until the loan must be repaid or renewed.

When they match, as in the examples above, the loan is fully amortizing and the last scheduled payment brings the balance to zero. When the amortization period is longer than the term, payments are calculated as if the loan ran the full amortization period, but the remaining balance falls due at the end of the term as a balloon payment.

Using the mortgage figures above as a hypothetical: a loan amortized over 30 years with a 10-year term would carry the same $1,798.65 monthly payment, but at the end of year 10 the borrower would owe a lump sum of about $251,000. That balance must be paid in cash, refinanced or otherwise settled. This structure appears in some commercial real estate and business lending, and the low monthly payment can hide how large the final obligation is.

Why the schedule is useful

• Budgeting. On a fixed-rate loan, the schedule shows the exact payment and the exact balance at any future date.
• Total cost. Summing the interest column shows what the loan really costs, which lets you compare offers with different rates and terms on the same basis.
• Tax records. Some interest is tax-deductible, home mortgage interest being the main example for U.S. taxpayers who itemize (IRS Publication 936 sets the rules). Only the interest portion qualifies, so the principal and interest split matters.

Extra payments, rate changes and other special considerations

Extra principal payments. Any amount applied to principal beyond the scheduled split lowers the balance immediately, so every later interest charge is smaller. On a fixed-payment loan the payment usually stays the same, so more of each future payment goes to principal and the loan ends earlier. Extra payments made early in a long loan have the largest effect, because they remove principal that would otherwise accrue interest for the most periods. Confirm that the lender applies extra money to principal rather than to future payments, and check for prepayment penalties.

Adjustable rates. An amortization schedule for an adjustable-rate loan is only accurate until the first rate change. At each reset, the lender recalculates the payment from the remaining balance, the new rate and the remaining number of payments.

Interest accrual method. The textbook schedule assumes interest is calculated once per month at one-twelfth of the annual rate and that every payment arrives on time in the scheduled amount. Some loans accrue interest daily on the outstanding balance, so paying a few days early or late shifts slightly more or less of the payment to interest than the printed schedule shows. Your lender’s statements, which also reflect actual payment dates, late fees, extra payments and rate resets, govern the actual split.

What the schedule leaves out. A mortgage amortization schedule covers principal and interest only. Property taxes, homeowners insurance and mortgage insurance collected through escrow are added to the monthly bill but are not part of the amortization math, and they can change from year to year without affecting the loan balance.

Loans that do not amortize normally. On an interest-only loan, the balance does not fall during the interest-only period. On a negatively amortizing loan, payments are smaller than the interest due, so the unpaid interest is added to the balance and the debt grows. Credit cards are revolving debt with minimum payments rather than a fixed amortization schedule.

Amortization schedules for intangible assets

In accounting, amortization also means spreading the cost of an intangible asset (a patent, copyright, trademark, customer list or software license, for example) over its useful life, matching the expense to the periods that benefit from the asset under standards such as U.S. GAAP. It works much like depreciation of physical assets, and the expense can also reduce taxable income.

Businesses usually use the straight-line method:

Annual amortization expense = Cost of the asset ÷ Useful life in years

There is no interest and no principal, so the schedule is simpler than a loan’s. A hypothetical $10,000 patent with a 10-year useful life is amortized at $1,000 a year:

Book (financial reporting) and tax treatment can differ. For U.S. federal tax purposes, the IRS sets recovery periods for many assets, and most acquired intangibles covered by Section 197 (including goodwill acquired in a business purchase) are amortized over 15 years regardless of their useful life for book purposes. Under GAAP, goodwill is generally tested for impairment rather than amortized, although private companies may elect to amortize it.

How to build your own amortization table

1. Gather the inputs: loan amount, annual rate, payments per year and term in years.
2. Convert to periodic figures and calculate the fixed payment with the formula or a PMT function.
3. Fill row 1 using the interest and principal steps above, then copy the row down n times, using each ending balance as the next beginning balance.
4. Check the last row. It should end at zero or within a few cents. If not, the rate or period count was likely not converted.
5. Add a column for extra payments to model prepayment, subtracting it from the balance along with the scheduled principal.

Summing the interest column by calendar year shows each year’s interest, which helps with budgeting and, where interest is deductible, tax planning.

FAQs

The Bottom Line

Borrowers weighing loan offers, refinancing or an early sale can use an amortization schedule to see total interest and the balance at any future date. On long loans, early payments go mostly to interest, so equity builds slowly at first. Lender statements govern the actual split, and adjustable rates, daily accrual and escrow items can make real bills differ from the printed table.