Loan Amortisation: How an EMI Splits Interest and Principal
A fixed loan payment hides a changing split between interest and principal. Here is the formula, a worked 5-year example and how a schedule is read.
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When you repay a loan in equal monthly instalments, the payment stays the same but what it is made of keeps changing. Early payments are mostly interest. Later ones are mostly principal, which is the amount you originally borrowed. This pattern is called amortisation, and it explains why a loan balance falls slowly at first and faster near the end.
What amortisation means
Capital One describes loan amortisation as paying off a loan through regular payments over time, where each payment covers part of the interest and part of the principal. Interest is charged on the balance still owed. As the balance shrinks, the interest charged each month shrinks too, so more of the same fixed payment is left over to reduce the balance.
This applies to loans where the rate stays fixed and the payments are level, such as many home, car and personal loans. The Consumer Financial Protection Bureau, a US regulator, notes that with a fixed-rate loan the interest rate and the monthly principal-and-interest payment stay the same for the whole term.
The payment formula
A standard formula gives the level payment. Wikipedia's page on amortisation calculators writes it as A = P × i ÷ (1 − (1 + i)^−n). Here P is the amount borrowed, i is the interest rate for one payment period, and n is the total number of payments.
- P: the amount borrowed, for example 5,00,000
- i: the yearly rate divided by 12 for monthly payments (12% a year becomes 1% a month)
- n: the number of payments (5 years of monthly payments is 60)
If the rate were zero, the payment would simply be P divided by n. The same source notes that the first payment falls due one full period after the loan starts, not on day one.
A worked example
Take a loan of 5,00,000 at 12% a year, repaid monthly over 5 years. The monthly rate is 1%, and there are 60 payments. The formula gives a payment of about 11,122.22. This is our own illustration, not a quote from any lender.
- Month 1: interest 5,000.00 (1% of 5,00,000), principal 6,122.22, balance afterwards about 4,93,877.78
- Month 2: interest about 4,938.78, principal about 6,183.45
- Month 30: interest about 2,952.09, principal about 8,170.13
- Month 60: interest about 110.12, principal about 11,012.10, balance zero
Over the 60 months the borrower pays about 6,67,333 in total, which means roughly 1,67,333 is interest. In the first month about 55% of the payment is principal. In the last month it is about 99%.
Reading an amortisation schedule
An amortisation schedule is a table with one row per payment. Each row shows the payment, the interest part, the principal part and the balance left. Capital One notes that borrowers can see the split month by month in such a schedule, and online calculators build one from the loan amount, rate and term.
Each row follows the same two steps. First, interest equals the previous balance multiplied by the period rate. Second, principal equals the payment minus that interest, and the new balance equals the old balance minus that principal. The payment must be bigger than the first month's interest, or the balance would never fall.
Why the term matters
The CFPB explains that a shorter term means higher monthly payments but typically a lower interest rate and lower total cost, while a longer term means lower monthly payments but typically a higher rate and higher total cost. Part of the reason is simple arithmetic: a longer loan keeps a larger balance outstanding for longer, and interest is charged on that balance.
When a loan does not amortise
Some loans are built differently. With interest-only periods, payments cover just the interest and the principal does not fall. With negative amortisation, the regular payment is smaller than the interest owed, so the unpaid interest is added to the balance and the debt grows. Loan documents state which type applies.
Amortisation is also an accounting word. In business accounts it means spreading the cost of an intangible asset, such as a patent, over its useful life. That is a different idea from the loan schedule described here.
What to take from this
A level payment is a simple promise on the surface, but behind it the interest share starts high and falls every month. Seeing the split explains why paying extra early in a loan reduces the balance on which later interest is charged, and why the first years of a long loan feel as if little progress is being made. This is general information, not financial advice; a lender's own schedule is the document that applies to a specific loan.
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