What is Loan Amortisation?

Loan amortisation is the process of repaying a loan through fixed monthly payments over a set period. Each payment is divided into principal (the amount you borrowed) and interest (the lender’s fee for borrowing). Over time, the share of principal increases, while interest decreases, helping you gradually pay off your debt.

This repayment structure is commonly used in:

• Home Loans (Mortgages)
• Car Loans
• Personal Loans
• Student Loans
• Business Loans

By understanding how amortisation works, borrowers can make informed decisions about loan affordability, interest costs, and repayment strategies.

How Does Loan Amortisation Work?

When you take out a loan, your lender provides an amortisation schedule, which outlines each payment and how much goes toward interest and principal.

Here’s a breakdown of how amortisation works:

1. Fixed Monthly Payments

Most loans follow an amortised repayment plan, meaning you pay a fixed amount each month until the loan is fully repaid.

2. Interest vs. Principal Allocation

• In the early years, most of your payment goes toward interest.
• As time passes, a larger portion of the payment goes toward principal, reducing the outstanding balance.

3. Declining Interest Payments

Since interest is calculated on the remaining loan balance, as you pay down the principal, the amount of interest owed each month decreases.

Example:
If you take out a $200,000 mortgage at 5% interest for 30 years, your monthly payment remains the same, but:

• In the first year, most of your payment covers interest.
• By year 15, you’re paying more toward principal than interest.
• By year 30, your loan is fully paid off.

Amortisation Schedule Example

Here’s an example of an amortisation schedule for a $20,000 car loan at 6% interest for 5 years:

Month	Payment	Principal	Interest	Balance
1	$387.97	$262.97	$125.00	$19,737.03
12	$387.97	$284.72	$103.25	$16,640.57
24	$387.97	$311.28	$76.69	$12,693.24
36	$387.97	$340.36	$47.61	$7,841.39
48	$387.97	$372.33	$15.64	$2,045.73
60	$387.97	$387.97	$0.00	$0.00

This schedule shows how interest decreases over time while principal repayment increases, leading to complete loan payoff by month 60.

Benefits of Loan Amortisation

Amortised loans offer several financial advantages:

✅ Predictable Monthly Payments

Since most loans follow a fixed repayment structure, you can plan your budget knowing exactly how much you owe each month.

✅ Interest Savings Over Time

As you pay down the principal, your interest payments shrink, reducing the total cost of borrowing.

✅ Build Equity (For Mortgage Loans)

With each mortgage payment, you own more of your home, increasing your net worth over time.

✅ Early Repayment Options

Many lenders allow extra payments toward principal, helping borrowers pay off loans faster and save on interest.

Amortisation vs. Interest-Only Loans

While amortised loans require payments toward both principal and interest, some loans are interest-only for a certain period.

Interest-Only Loans

• Borrowers pay only interest for a set number of years.
• After the interest-only period, payments increase since principal payments begin.
• Common in investment properties and adjustable-rate mortgages (ARMs).

Amortised Loans

• Principal and interest are paid together from the start.
• Ensures steady debt reduction over time.
• Most mortgages, car loans, and personal loans follow this structure.

If you prefer lower initial payments, an interest-only loan may be appealing. However, an amortised loan ensures steady progress toward full repayment.

How to Use the Amortisation Calculator

Our amortisation calculator helps you understand your loan repayment schedule by showing:
📌 Your monthly payment amount
📌 Breakdown of principal vs. interest
📌 Your total interest paid over the loan term
📌 How making extra payments can reduce loan costs

Steps to Use the Calculator:

1.) Enter Loan Amount – The total your borrowing.
2.) Set Interest Rate – The annual percentage rate (APR).
3.) Choose Loan Term – How many years/months you’ll take to repay.
4.) Click «Calculate» – Get your amortisation schedule instantly!

Want to save on interest? Try adjusting the loan term or making extra payments to pay off debt faster.

How to Pay Off an Amortised Loan Faster

Here are some tips to reduce interest costs and pay off your loan ahead of schedule:

🔹 Make Biweekly Payments – Instead of one monthly payment, pay half the amount every two weeks. This results in one extra payment per year, reducing your loan term.

🔹 Round Up Your Payments – If your monthly payment is $974, round it up to $1,000 to chip away at the principal faster.

🔹 Apply Extra Cash – Use tax refunds, bonuses, or side income to make lump sum payments.

🔹 Refinance for a Lower Interest Rate – If rates drop, refinancing can reduce interest costs and shorten your loan term.

By following these strategies, borrowers can potentially save thousands of dollars over the life of a loan.

---

Final Thoughts: Plan Your Loan Wisely

Understanding loan amortisation is crucial for managing debt effectively. Whether you’re financing a home, car, or business, knowing how your payments are structured helps you make informed financial decisions.

Use our loan amortisation calculator to explore different repayment scenarios and take control of your finances today!