About Amortization Calculator
Understanding Loan Amortization
Loan amortization is the process of paying off a debt, such as a mortgage, car loan, or personal loan, over a set period through regular, systematic payments. Each payment you make is typically split into two parts:
- Interest: A portion of the payment covers the interest due on the outstanding loan balance for that period.
- Principal: The remaining portion of the payment goes towards reducing the original amount you borrowed (the principal).
As you make payments, the interest portion gradually decreases because it's calculated on a smaller remaining balance, while the principal portion increases. This dynamic is clearly visible in an amortization schedule. Our Amortization Calculator helps you visualize this process.
It's important to note that not all types of debt are amortized. For example, credit cards usually represent revolving debt, where the balance can be carried over, and payment amounts can vary. Interest-only loans (with a period of only interest payments) and balloon loans (with a large principal payment at the end) are other examples of non-amortized loans.
What is an Amortization Schedule?
An amortization schedule, sometimes referred to as an amortization table, is a detailed breakdown of each periodic payment for an amortizing loan. When you use our calculator, it will generate both an annual and a monthly amortization schedule. This schedule clearly shows:
- For each payment period:
- The total payment amount.
- How much of that payment is applied to interest.
- How much is applied to the principal.
- The cumulative interest and principal paid to date.
- The remaining principal balance of the loan after each payment.
A standard amortization schedule typically doesn't account for extra payments or additional loan fees. Generally, these schedules are most accurate for fixed-rate loans, where the interest rate remains constant throughout the loan term. They may not accurately reflect payments for adjustable-rate mortgages (ARMs), variable-rate loans, or lines of credit where the interest rate can change.
Amortization in Business Accounting (Spreading Costs)
While our calculator focuses on loan repayment, "amortization" has another meaning in business accounting. It refers to the practice of spreading the cost of an expensive, long-lived intangible asset (like a patent, copyright, or goodwill) over its useful life. This is similar to how tangible assets (machinery, buildings) are depreciated. For tax purposes in the U.S. (under Section 197), the value of certain intangible assets can be deducted periodically. This helps businesses reflect the expense of these assets more accurately over time rather than as a single large hit to their financials.