Amortization

Amortization summary: 

• Amortization on a loan means that the amount of interest covered by each loan payment decreases over time. 

• Any installment loan with a set payoff date can be amortized. Loans that can be amortized include mortgages, auto loans, and personal loans. 

• Credit card debt isn't amortized because the amount of debt could change, which means the portion of your payment that goes to interest could also change. 

Amortization Definition and Meaning

Amortization on a loan, also called loan amortization, is a way of showing how much of each loan payment is applied to interest versus the principal balance. A loan amortization schedule shows how your loan payments are broken down over time between principal and interest. This can help you understand how much your loan costs each month, each year, and over the life of the loan. 

Key Features of Amortization 

Amortization for loans works in a few important ways, and most amortized loans have certain features in common. If you have an amortized loan, here are key features that you can expect to find. 

Fixed payments

The loan payments are typically the same every month. Fixed payments help you fit the installment loan into your monthly budget. Within that fixed payment, the amount that goes to interest changes as the loan balance goes down.  

More interest at the beginning

The earlier payments on an amortized loan will be mostly interest. Over time, as the years go by over the life of the loan, the amount of interest covered by each fixed payment decreases. 

More principal at the end

As you continue to make payments, the amount that is applied to the principal balance goes up. By the last few payments of your amortized loan, you'll be paying mostly principal.  

Amortization schedule or table

Your lender or creditor can give you an amortization schedule (or amortization table) that shows you a detailed breakdown of exactly how much interest and principal is in each of your loan payments. The numbers will depend on your loan’s interest rate, the term of the loan, the total loan amount, and other factors. 

Here’s an example. It’s a two-year, $10,000 car loan. The interest rate is 5%. The payment is about $439 per month. 

In the very first payment, $41.67 goes to interest. In the very last payment, only $1.82 goes to interest. 

Real-Life Examples of Amortization 

Before you sign up for a loan or credit account, find out if it uses amortization. Here are a few real-life examples of loans that use amortization: 

• Mortgage loans

• Auto loans 

• Personal loans (such as debt consolidation loans)

• Home equity loans 

• Student loans

With all of these types of loans, you can typically make a fixed payment that includes interest and principal. Over time, as you pay off the loan, the amount of interest in each fixed payment should decrease. That’s what amortization means for a loan: The interest gradually amortizes, diminishes, and goes away. 

Not all loans and credit accounts use amortization. These non-amortizing accounts include credit cards, some HELOCs, and other special types of loans like interest-only loans. 

With credit card debt, your payments aren't fixed. The payment amount could change if your balance changes.