How to Read an Amortization Schedule: Principal vs. Interest Explained

What Is an Amortization Schedule?

An amortization schedule is a table that details each periodic payment on an amortizing loan. It shows how much of each payment goes toward interest, how much goes toward the principal, and the remaining loan balance after every payment.

For a fixed-rate loan, your monthly principal and interest payment stays the same for the entire loan term. But the way that payment is split changes over time. Early in the loan, a larger portion goes to interest because your balance is highest. As you pay down the balance, the interest portion shrinks and more of your payment is applied to principal.

Sources: Calculator.net, Consumer Financial Protection Bureau (CFPB), Investopedia

How Payments Are Split Between Principal and Interest

The monthly payment for a fixed-rate loan is calculated using a standard formula: M = P × [r(1+r)^n] / [(1+r)^n − 1], where P is the loan principal, r is the monthly interest rate (annual rate divided by 12), and n is the number of monthly payments.

To find the interest portion of a specific payment, multiply the current outstanding balance by the monthly interest rate. The principal portion is simply the total monthly payment minus that interest amount.

• As the balance decreases, the interest portion drops, so more of your payment goes toward reducing the principal.

Sources: Investopedia, Ramsey Solutions

Example Amortization Table for a $20,000 Loan

(This is a simplified example for demonstration; actual schedules are calculated using the standard formula.)

Sources: Investopedia, Ramsey Solutions

extra payments on the schedule

Making extra principal payments can significantly reduce the total interest you pay and shorten your loan term. Extra payments are typically applied directly to the principal balance, which lowers the remaining balance and reduces the amount of interest that accrues each month.

For example, on a $200,000 30-year fixed-rate mortgage at 4% interest, paying an extra $100 per month could cut more than 4.5 years off the loan term and save more than $26,500 in interest. The exact savings depend on your loan amount, interest rate, and when you start making extra payments.

• Check with your lender to confirm that extra payments are applied to principal and not treated as early payments of future installments.
• Some lenders may charge a prepayment penalty if you pay off the loan early; this is not universal, but it's worth checking your loan agreement.
• Even small extra payments can make a noticeable difference over the life of a long-term loan.

Sources: U.S. Bank, Consumer Financial Protection Bureau (CFPB)

How to Create Your Own Schedule in a Spreadsheet

You can build an amortization schedule in a spreadsheet using the same formula and steps described above. This gives you full control and lets you experiment with different loan amounts, rates, and extra payments.

Start by entering the principal, annual interest rate, and loan term in months. Calculate the monthly payment using the formula M = P × [r(1+r)^n] / [(1+r)^n − 1], then create rows for each payment period.

1. In a spreadsheet, set up columns: Payment #, Beginning Balance, Interest, Principal, New Balance, and Cumulative Interest.
2. Enter the loan amount, annual interest rate, and loan term in months.
3. Compute the monthly interest rate by dividing the annual rate by 12.
4. Calculate the monthly payment using the formula: M = P × [r(1+r)^n] / [(1+r)^n − 1].
5. For each payment: Interest = Beginning Balance × monthly rate. Principal = Monthly Payment − Interest. New Balance = Beginning Balance − Principal.
6. Repeat for each payment period, using the new balance as the next row's beginning balance.
7. To model extra payments, simply reduce the beginning balance by the extra principal amount before computing interest for that period.

Sources: Investopedia, Ramsey Solutions, Calculator.net