How loan amortization works

Amortizing means paying back a loan in instalments that mix two different things: the principal, which is the money you were lent, and the interest, which is what it costs to keep it. An amortization schedule is the calendar that tells you, payment by payment, how much of what you pay goes to each, and how much you still owe.

Why the early payments are almost all interest

This is the question everyone asks the first time they see the schedule: you pay for years and the balance barely moves. There is no catch. The interest in each payment is calculated on what you owe at that moment, not on the original loan. Early on you still owe nearly everything, so the interest share is large and little is left to reduce the principal.

As the balance falls, the interest in each payment falls with it, and because the payment stays the same in the French system, more of it goes to principal. The process speeds itself up. On a 200,000 loan at 4% over 25 years, the first payment puts about 667 toward interest and about 389 toward principal; the last one is almost entirely principal.

The three systems: French, German and American

There is more than one way to split a payment. The three systems this tool calculates all repay the same principal, but they change when you repay it — and therefore how much interest you end up paying.

French

A constant payment for the whole life of the loan. It is the most common in mortgages because the payment is predictable. Within that fixed payment, the interest share falls and the principal share rises.

German

Constant principal: you repay the same slice of the loan every time, and because the balance falls faster, the interest drops and the total payment shrinks over time. The first payments are higher than in the French system, but you pay less interest overall.

American

You pay interest only for the whole term and repay the entire principal in the final payment. The instalments are very low and the total interest is the highest of the three, because the balance never goes down.

The payment formula

In the French system the payment comes from the annuity formula, where P is the principal, i the interest rate per period and n the number of payments:

C = P · i / (1 − (1 + i)−n)

The detail that trips people up: i is the rate per period, not the annual rate. At 6% a year with monthly payments, i is 0.005, not 0.06. That is why this calculator asks separately how often interest is applied and how often you pay.

How to read the schedule

Each row is one payment. Payment is what leaves your account; principal and interest are how it splits; balance is what you still owe afterwards. The totals row at the bottom carries the figure that actually matters when comparing offers: the interest total is what the loan costs you.

What happens if you overpay

An extra payment goes entirely against the principal, so it reduces the balance that every future interest charge is calculated on. The effect is disproportionate and arrives early: on that 200,000 loan at 4% over 25 years, an extra 200 a month cuts six years off it and saves around 31,000 in interest. The sooner you do it, the more it shows, because more future interest is avoided.

Common mistakes

• Confusing the nominal rate with the APR. The APR includes fees and charges, so it is always higher — and it is the only figure that compares offers fairly.
• Looking at the payment instead of the total. Stretching the term lowers the payment and raises what you end up paying. Those are two different questions: what you can afford monthly, and what the loan costs.
• Forgetting insurance and fees. This schedule covers principal and interest; tied insurance, arrangement fees and valuation costs sit outside it and can add up.
• Overpaying to lower the payment instead of shortening the term. Where you get to choose, shortening the term saves considerably more interest, because it removes whole periods from the end.

Frequently asked questions

How much interest will I pay in total?

It is the totals row of the schedule, interest column. It depends on the principal, the rate, the term and the system: with identical inputs, the German system pays less interest than the French one, and the American considerably more than both.

Is the French or the German system better?

It depends on your cash flow. The German one costs less interest overall, but its early payments are higher; the French one is predictable and easier to fit into a budget. Home mortgages usually use the French system, and you often do not get to choose.

Can I use this for a car or personal loan?

Yes. The mechanics are the same for any fixed-instalment loan; only the numbers change. Pick the payment frequency that applies and make sure the rate you enter is the nominal rate, not the APR.

This tool calculates principal and interest from the figures you enter. It does not include fees, insurance or taxes, and it is not financial advice: always confirm the numbers with your lender before signing.