How to read a loan amortization schedule

Every payment is part interest, part principal. The proportion shifts, and understanding how explains a great deal.

An amortization schedule lists every payment over a loan's life and shows how each one divides between interest and the balance itself.

Step-by-step

1. Enter the amount, rate and term.
2. Generate the schedule.
3. Look at the split in the first year and compare it with the last.

Why early payments barely touch the balance

Interest is charged on what you still owe. At the start you owe almost everything, so almost the whole payment goes to interest. As the balance falls, the interest portion falls with it and more of each identical payment goes to principal.

On a long mortgage the first year's payments can be overwhelmingly interest. People are routinely shocked by this, and it is the single most useful thing a schedule shows.

Why overpaying early is worth so much

An extra payment goes entirely against the principal, and every future interest charge is calculated on the reduced balance. So an overpayment in year one saves interest for the entire remaining term, while the same amount in the final year saves almost nothing.

This is why the standard advice is to overpay as early as you can afford to.

Reading the total

The total interest column is sobering and worth looking at squarely. Over a long term at a typical rate, total interest can approach or exceed the amount borrowed. It is the actual price of the loan, and it is never the number in the advertisement.

Frequently asked questions

Why is so much of my early payment interest?

Because interest is charged on the outstanding balance, which is at its largest at the start. The payment stays the same while its composition shifts steadily toward principal.

Does overpaying early really matter that much?

Yes. An overpayment reduces the balance that all future interest is charged on, so the earlier it happens the longer it keeps saving. The same sum paid near the end saves very little.

Is this the same as my lender's figures?

It should be close. Small differences arise from how a lender rounds, whether interest is calculated daily or monthly, and any fees folded into the loan.