How the Amortization Calculator Works
Amortization is the way a loan is paid off in equal payments over time. Each payment has two parts: interest, which is the cost of borrowing, and principal, which reduces what you owe. The payment stays the same, but the split changes every month. The Amortization Calculator works out the payment and shows the whole schedule, so you can see where every dollar goes.
What you enter
- Loan amount: the amount you borrow.
- Interest rate: the yearly rate.
- Loan term: the length of the loan, in years or in months.
- Extra payment each month (optional): an amount you add to every payment. It all goes to the loan balance.
- First payment: the month and year of your first payment, so the schedule shows real dates.
How the schedule is worked out
First the payment. Here r is the monthly rate (the yearly rate divided by 12) and n is the number of months:
payment = loan x r / (1 - (1 + r)^-n)
Then each month follows the same steps:
interest = balance x r principal = payment - interest new balance = balance - principal
Because the balance falls, the interest falls too, and more of the next payment goes to principal. On the last payment, the balance reaches zero.
A worked example
You borrow $20,000 for 4 years at 7.5%, with the first payment in January 2027.
| Result | Amount |
|---|---|
| Monthly payment | $483.58 |
| Total of the 48 payments | $23,211.75 |
| Total interest | $3,211.75 |
| Last payment | December 2030 |
The first two months of the schedule:
| Payment | Date | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | Jan 2027 | $125.00 | $358.58 | $19,641.42 |
| 2 | Feb 2027 | $122.76 | $360.82 | $19,280.60 |
| ... | ||||
| 48 | Dec 2030 | $3.00 | $480.57 | $0.00 |
In the first month, $125.00 of the $483.58 is interest. That is $20,000 x 0.625%, because 7.5% a year divided by 12 is 0.625% a month. In the last month, only $3.00 is interest.
Year by year
| Year | Pays off the loan | Interest | Balance at the end |
|---|---|---|---|
| 1 | $4,454 | $1,349 | $15,546 |
| 2 | $4,800 | $1,003 | $10,746 |
| 3 | $5,172 | $631 | $5,574 |
| 4 | $5,574 | $229 | $0 |
Chart: interest paid each year
Year 1 ██████████████████████████████████████ $1,349 Year 2 ████████████████████████████ $1,003 Year 3 ██████████████████ $631 Year 4 ██████ $229
The calculator draws every year as a bar. The part that pays off the loan is green, and the interest on top is amber. As the years pass, the green grows and the amber shrinks.
The effect of an extra payment
Adding $100 to each payment in the example:
| Result | No extra | $100 extra |
|---|---|---|
| Total interest | $3,211.75 | $2,577.88 |
| Paid off in | 48 months | 39 months |
| Last payment | Dec 2030 | Mar 2030 |
The extra $100 a month saves $633.87 in interest and finishes the loan 9 months early.
The effect of the term
A longer loan has a smaller payment, but costs more in interest. The same $20,000 at 7.5%:
| Term | Monthly payment | Total interest |
|---|---|---|
| 24 months | $899.99 | $1,599.80 |
| 36 months | $622.12 | $2,396.48 |
| 48 months | $483.58 | $3,211.75 |
| 60 months | $400.76 | $4,045.54 |
| 72 months | $345.80 | $4,897.76 |
Tips
- Pay extra early. Extra money saves the most in the first years, when the balance is highest.
- Check that extra payments go to the principal. Ask your lender to apply them to the balance, not to the next payment.
- Use the schedule for planning. It shows exactly what you owe at any date, which helps if you plan to sell, refinance or pay off early.
- Compare terms by total interest, not only by the monthly payment.
What this calculator does not include
- Loans with a rate that changes, and loans with interest-only or balloon payments.
- Fees, insurance, and taxes, such as those on a mortgage.
- Lenders that count interest by the day. Their schedules may differ by a few cents or dollars.
This tool gives an estimate for general information only. It is not financial advice. Your loan agreement sets the real payment and schedule.