Understanding how loan payments split between principal and interest reveals the true cost of borrowing. This calculator generates a complete amortization schedule showing exactly how each payment reduces your debt over time.
How This Calculator Works
This calculator generates a complete loan payment schedule:
- Loan Amount: Principal borrowed
- Interest Rate: Annual percentage rate (APR)
- Loan Term: Total repayment period
- Monthly Payment: Fixed amount due each month
- Amortization Schedule: Payment-by-payment breakdown
- Interest vs Principal: How each payment splits over time
The Formula Explained
Monthly Payment = P × [r(1+r)^n] / [(1+r)^n - 1]
For each payment: Interest Portion = Remaining Balance × Monthly Rate Principal Portion = Payment - Interest Portion
Early payments are mostly interest; later payments are mostly principal.
Step-by-Step Example
$250,000 Mortgage at 6.5% for 30 Years
| Payment | Principal | Interest | Balance |
| #1 | $225 | $1,354 | $249,775 |
| #60 (Year 5) | $310 | $1,269 | $232,680 |
| #180 (Year 15) | $563 | $1,016 | $185,890 |
| #300 (Year 25) | $1,024 | $555 | $101,800 |
| #360 (Final) | $1,575 | $4 | $0 |
Total paid: $568,862 (Principal: $250,000 + Interest: $318,862)
Frequently Asked Questions
What is loan amortization?
Amortization is the process of gradually paying off a loan through scheduled payments that include both principal (the amount borrowed) and interest. Each payment reduces the balance, and future interest is calculated on the new lower balance. The payment remains fixed but the principal/interest ratio changes.
Why do early payments have more interest?
Interest is calculated on the remaining balance. When balance is high (early in the loan), more of your payment covers interest. As balance decreases, less interest accrues, so more of each payment goes to principal. This is why extra payments early have outsized impact.
How can I pay off my loan faster?
Strategies: (1) Make extra principal payments—even small amounts help, (2) Round up payments, (3) Biweekly payments (equals one extra monthly payment yearly), (4) Apply windfalls—tax refunds, bonuses direct to principal. Early in the loan, extra payments have the greatest impact.
What's the difference between loan term and amortization?
Loan term is the time you have to repay. Amortization is the schedule of payments. A 30-year amortization with 5-year term (balloon) means payments calculated as if 30 years, but balance due after 5. Most loans have matching term and amortization.
How does a shorter term save money?
Shorter terms mean: (1) Less time for interest to accrue, (2) Higher monthly payments but lower total cost. A $250,000 mortgage costs $318,862 in interest over 30 years at 6.5%, but only $152,097 over 15 years. The 15-year loan saves $166,000!
What is negative amortization?
Negative amortization occurs when payments don't cover interest owed, causing the balance to grow. This can happen with certain adjustable-rate mortgages or graduated payment plans. Avoid negative amortization—you end up owing more than you borrowed.
Should I refinance to a lower rate?
Refinancing makes sense when: (1) New rate is at least 0.5-1% lower, (2) You'll stay long enough to recover closing costs (calculate break-even), (3) You won't extend the term significantly. Compare total remaining interest on current loan vs new loan including all costs.
How do I read an amortization schedule?
An amortization schedule shows each payment broken down: payment number, payment date, principal portion, interest portion, and remaining balance. Watch how the split changes over time. The "total interest paid" column shows cumulative interest cost—often shockingly high.
Key Points to Remember
- Early payments = mostly interest: Principal portion grows over time
- Extra payments save dramatically: Each extra dollar reduces future interest
- Shorter terms save money: Higher payments but much less total interest
- Front-load extra payments: Impact is greatest early in the loan
- Compare total cost: Not just monthly payment when choosing loan terms
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