What is Loan Amortization?
Loan amortization is the gradual reduction of your loan balance through regular EMI payments. Each EMI payment is divided into two parts: interest and principal. The proportion changes over time following a mathematical schedule called an amortization table.
Why Does Most of Your Early EMI Go to Interest?
Interest is calculated on the outstanding principal balance. At the start of your loan, the outstanding balance is at its maximum, so the interest portion of your EMI is also at its maximum. As you pay down the principal month by month, the interest portion shrinks and the principal portion grows.
Amortization Example: $200,000 Loan at 9% for 20 Years
Monthly EMI = $1,800
| Year | Annual EMI | Principal Paid | Interest Paid | Balance Remaining |
|---|---|---|---|---|
| Year 1 | $21,600 | $3,530 | $18,070 | $196,470 |
| Year 5 | $21,600 | $4,990 | $16,610 | $180,490 |
| Year 10 | $21,600 | $7,720 | $13,880 | $151,870 |
| Year 15 | $21,600 | $11,940 | $9,660 | $105,600 |
| Year 20 | $21,600 | $18,450 | $3,150 | $0 |
How to Use Amortization to Your Advantage
The key insight from amortization is that prepayments made early in the loan tenure save you the most money. This is because early prepayments reduce the principal when the outstanding balance is highest, which reduces future interest calculations dramatically.
Calculate Your Loan Breakdown
Use our free EMI calculator to see your exact principal and interest breakdown for any loan.