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How loan amortization works

2 min read · Updated 3 October 2026

An amortizing loan (a typical mortgage, car loan or personal loan) has a fixed payment each period. Each payment first covers the interest owed for that period; the rest reduces the balance. As the balance shrinks, so does the interest, so more of each later payment goes to the balance.

The payment formula

For a loan of amount P at an annual rate r paid monthly over n months, with monthly rate i = r ÷ 12:

payment = P × i ÷ (1 − (1 + i)^−n)

For $200,000 at 6 % over 30 years: i = 0.005 and n = 360, so the payment is $1,199.10 per month.

At 0 % interest the formula does not apply; the payment is simply P ÷ n.

Month by month

In the first month of that loan, interest is $200,000 × 0.005 = $1,000.00, so only $199.10 of the payment reduces the balance. Thirty years later, the final payments are almost entirely principal. Over the whole loan you pay roughly $231,700 in interest, which is more than the amount borrowed. The loan calculator builds the full schedule, rounding each month to the cent the way lenders do, with the last payment adjusted so the balance ends at exactly zero.

Extra payments

Any extra amount paid goes straight to the balance, and every later month's interest is then calculated on a smaller balance. Because early months are interest-heavy, extra payments early in the loan save the most. Adding even a modest amount each month can shorten a 30-year mortgage by several years; the calculator shows the exact months and interest saved for your numbers.

Check your loan agreement first: some lenders charge prepayment penalties or require you to tell them to apply extra money to principal.

APR versus interest rate

The interest rate determines the payment. The APR also folds in fees and certain charges, so it is the better number for comparing offers, but you cannot plug it into the payment formula to get your actual payment.

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