What it calculates

A loan amortization schedule shows every payment over the life of a loan, split into interest and principal, with the balance remaining after each one. It is how you see the true cost of borrowing rather than just the monthly payment.

How it is calculated

For a level-payment loan, the payment is fixed and derived from the principal, the periodic rate and the number of periods. Each period, interest is charged on the outstanding balance and the rest of the payment reduces principal. Because the balance falls, the interest portion shrinks and the principal portion grows, even though the payment itself never changes.

How to read the result

The early payments are mostly interest, which is why paying off a mortgage in the first years barely moves the balance. Total interest over the life is the number that matters for comparing loans, not the monthly payment - a longer term always lowers the payment and almost always raises the total cost. Any extra payment applied to principal removes all the future interest that principal would have generated, which is why overpayments early are worth far more than the same amount later.

Worked example

300,000 over 30 years at 6% gives a monthly payment of about 1,798.65. The first payment is 1,500 interest and only 298.65 principal. Total interest across the full term is roughly 347,515 - more than the amount borrowed. Adding 200 a month cuts the term to about 24 years and saves around 87,000 in interest.

Common questions

Why is so much of the early payment interest?

Because interest is charged on the balance outstanding, and at the start the balance is at its maximum. As the balance falls the interest charge falls with it, so a steadily larger share of the same payment goes to principal.

Does making extra payments actually save money?

Yes, and disproportionately when made early. Every extra dollar of principal permanently removes the interest that dollar would have accrued for the whole remaining term. Confirm the lender applies overpayments to principal rather than treating them as advance payments.

What is the difference between the interest rate and the APR?

The interest rate prices the borrowing alone. The APR folds in fees and points, expressed as an annual rate, so it is the better basis for comparing offers - though it assumes you hold the loan to term, which most borrowers do not.