Understanding Amortization Schedule: A Complete Guide
An amortization schedule is a detailed table showing how your loan payments are split between principal and interest over time. It's essential for understanding your loan.
What is Amortization?
Amortization is the process of paying off a loan through regular installments. The amortization schedule shows exactly how much of each payment goes towards principal and interest.
Components of Amortization Schedule
- Month/Payment Number: Sequential number of the payment
- EMI Amount: Fixed monthly payment
- Principal: Amount going towards loan reduction
- Interest: Amount going towards lender's cost
- Outstanding Balance: Remaining loan amount
Key Features of Amortization
Early Payments (High Interest): In the beginning, most of your EMI goes towards interest. For example, in the first payment of a 20-year home loan, 95% might be interest and only 5% principal.
Later Payments (High Principal): As you progress, the ratio reverses. In the last payment, most goes towards principal.
Example Amortization Schedule
₹20,00,000 loan at 8% annual interest for 20 years:
| Month | EMI | Principal | Interest | Balance |
|---|---|---|---|---|
| 1 | ₹19,207 | ₹607 | ₹18,600 | ₹19,99,393 |
| 120 (Year 10) | ₹19,207 | ₹2,410 | ₹16,797 | ₹10,58,000 |
| 240 (Year 20) | ₹19,207 | ₹18,888 | ₹319 | ₹0 |
Why Understanding Amortization Matters
- See the true cost of borrowing (total interest)
- Plan for early repayment strategically
- Understand when prepayments have maximum impact
- Compare different loan offers effectively