Amortization Schedule

What is an amortization schedule?

An amortization schedule is a table that shows how the value of a loan or an intangible asset declines over time. For loans, it lists each payment and breaks it into interest and principal components. For intangible assets (patents, trademarks, goodwill), it shows how the asset’s cost is allocated across its useful life.

How loan amortization works

• Each loan payment covers interest first (the cost of borrowing) and then principal (the remaining unpaid balance).
• Early in the loan term, the outstanding balance is highest, so a larger share of each payment goes to interest.
• Over time, as the balance falls, the interest portion shrinks and more of each payment reduces principal.
• The total monthly payment usually stays constant for a fully amortizing fixed-rate loan.

Key formulas

• Monthly interest rate: i = annual interest rate / 12
• Number of payments: n = years × 12

Monthly payment (for a fixed-rate amortizing loan):
Payment = LoanAmount × [ i × (1 + i)^n ] / [ (1 + i)^n − 1 ]

Principal portion of a monthly payment:
PrincipalPayment = Payment − (OutstandingBalance × i)

Where:
– LoanAmount = original loan amount
– i = monthly interest rate (decimal)
– n = total number of monthly payments
– OutstandingBalance = remaining loan balance before the payment

Loan amortization vs. loan term

• Amortization schedule: the payment plan used to calculate each payment (e.g., amortized over 30 years).
• Loan term: the length of time before the loan is due (e.g., a 10-year term).
  A loan can be amortized over a longer period than its term. If the term ends before the amortization schedule completes, a remaining balance (balloon payment) must be paid or refinanced.

Benefits of using an amortization schedule

• Budgeting: know exactly what you owe each month.
• Transparency: see how much total interest you’ll pay over the life of the loan.
• Comparison: evaluate different loan offers by total interest and payment structure.
• Planning prepayment: see how extra payments reduce interest and shorten the loan (watch for prepayment penalties).
• Tax preparation: separate interest vs. principal for potential interest deductions (e.g., mortgage interest).

Amortization of intangible assets

Businesses amortize intangible assets to allocate their cost over the asset’s useful life, similar to depreciation for tangible assets. The most common method is straight-line amortization:

Annual Amortization Expense = AssetCost / UsefulLifeYears

Example: a $10,000 patent with a 10-year useful life is amortized at $1,000 per year.

Note: Tax authorities often prescribe specific recovery periods for different asset types.

Examples

Loan example
– Loan amount: $30,000
– Annual interest rate: 3% → monthly i = 0.03 / 12 = 0.0025
– Term: 4 years → n = 48 months

Compute the monthly payment with the formula above; it equals approximately $664.03.

First-month breakdown:
– Interest = OutstandingBalance × i = $30,000 × 0.0025 = $75.00
– Principal = Payment − Interest = $664.03 − $75.00 = $589.03

Over the loan term, the payment stays about the same while interest declines and principal increases. In the final month, interest will be very small (about $1.66 in this example).

Intangible asset example
– Asset cost: $10,000
– Useful life: 10 years
– Annual amortization expense = $10,000 / 10 = $1,000 per year

Bottom line

An amortization schedule clarifies how payments reduce debt over time or how an asset’s cost is expensed. Understanding these schedules helps you compare loans, plan prepayments, budget effectively, and manage business accounting for intangible assets.