What Is an Amortization Schedule? How to Calculate With Formula

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What Is an Amortization Schedule? How to Calculate With Formula

An amortization schedule is a table that shows how a loan or intangible asset is expensed over time. For loans, it lists each payment and the portion that goes to interest versus principal, and it shows the remaining balance after each payment. For intangible assets, it shows how the asset’s cost is allocated across its useful life.

Key takeaways

  • Amortization schedules show each payment, interest vs. principal breakdown, and remaining balance.
  • Early payments are mostly interest; later payments apply more to principal.
  • Schedules help with budgeting, comparing loans, planning early repayment, and accounting for intangible assets.

How a loan amortization schedule works

A typical loan amortization schedule assumes fixed periodic payments. Each payment covers:
* Interest: calculated on the outstanding loan balance.
* Principal: the remainder of the payment that reduces the outstanding balance.

Because interest is computed on the current balance, the interest portion is larger at the beginning. As the balance declines, interest falls and principal repayment increases while the total payment stays the same.

How to calculate loan amortization

  1. Calculate the monthly interest rate:
    i = annual interest rate / 12

  2. Monthly payment (fixed payment) formula:
    Total Payment = Loan Amount × [ i × (1 + i)^n ] / [ (1 + i)^n − 1 ]
    where:

  3. i = monthly interest rate (decimal)

  4. n = total number of payments (months)

  5. Interest portion for a period:
    Interest = Outstanding Loan Balance × i

  6. Principal portion for a period:
    Principal Payment = Total Payment − Interest

  7. Update outstanding balance:
    New Balance = Outstanding Balance − Principal Payment

Repeat steps 3–5 for each payment to build the full amortization schedule.

Example (car loan)

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

Monthly payment:
Total Payment ≈ $30,000 × [0.0025 × (1.0025)^48] / [(1.0025)^48 − 1] ≈ $664.03

First month:
* Interest = $30,000 × 0.0025 = $75.00
Principal = $664.03 − $75.00 = $589.03
 New balance = $30,000 − $589.03 = $29,410.97

By the final payment the interest portion is very small (about $1.66 in this example) and nearly the entire payment goes to principal.

Loan amortization schedule vs. loan term

  • Amortization period: the schedule used to calculate payments (e.g., amortized over 30 years).
  • Loan term: the period before the loan must be paid off, renewed, or refinanced (e.g., 10-year term).
    If the term is shorter than the amortization period, a balloon payment (remaining balance) will be due at term end unless refinanced.

Benefits of using an amortization schedule

  • Budgeting: know exact monthly payments and timing.
  • Transparency: see total interest cost and how payments reduce balance.
  • Tax planning: separate principal and interest for deductible interest (when applicable).
  • Prepayment planning: evaluate how extra payments reduce interest and shorten the loan (watch for prepayment penalties).

Amortization for intangible assets

Businesses amortize intangible assets (patents, trademarks, goodwill) to spread their cost over the asset’s useful life. Commonly used method:
* Straight-line amortization: Cost / Useful life = annual amortization expense.
Example: A $10,000 patent with a 10-year useful life → $1,000 amortization expense per year.

Tax rules and allowable amortization periods vary by jurisdiction and asset type.

Bottom line

An amortization schedule is a practical tool for understanding how loans are repaid and how intangible assets are expensed. Use the monthly payment and breakdown formulas to create schedules that help compare loan offers, plan payments, and manage financial decisions.