# Amortized Loan Explained: Definition, Types, Calculation, and Examples

![Amortized Loan](https://www.investopedia.com/thmb/8bjB3-InrzUe1e1nglX-VgBQ7VE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/amortized_loan.asp-final-23646fe3883e4f87902df8207a750e0a.png)

*— Investopedia / Theresa Chiechi*

## What Is an Amortized Loan?

An amortized loan involves regularly scheduled payments, with each payment covering both interest and principal. Initially, payments are interest-heavy, but over time, they gradually favor the principal. Common examples include mortgages and personal loans. Understanding amortized loans can empower your financial decisions by revealing how payments reduce debt over time.  

### Key Takeaways

*   An amortized loan involves scheduled payments that cover both interest and principal, with the initial payments being more interest-heavy.
*   As you make monthly payments on an amortized loan, the portion going towards interest decreases, while the portion reducing the principal increases.
*   Common types of amortized loans include fixed-rate mortgages, auto loans, and personal loans from banks.
*   Paying extra towards an amortized loan can reduce the principal balance and shorten the loan term, but does not alter the monthly payment amounts.  
    
*   Amortization schedules help borrowers understand how their payments are applied to interest and principal over time.

## Understanding the Mechanics of Amortized Loans

With an amortized loan, part of each fixed payment covers the interest, and the rest reduces the principal. The interest on an amortized loan is calculated based on the most recent ending balance of [the loan](https://www.investopedia.com/the-best-personal-loans-for-debt-consolidation-8762444).

### Principal and Interest

As payments are made, the principal decreases, which reduces the balance for interest calculation. As a result, the interest amount owed decreases over time.

As the interest portion of an amortized loan decreases, the principal portion of the payment increases. Therefore, [interest and principal](https://www.investopedia.com/terms/p/piti.asp) have an inverse relationship within the payments over the life of the amortized loan.

### How to Calculate an Amortized Loan

An amortized loan is the result of a series of calculations. First, the loan's current balance is multiplied by the interest rate attributable to the current period to find the interest due for the period. (Annual interest rates may be divided by 12 to find a monthly rate.)

Subtracting the interest due for the period from the total monthly payment results in the dollar amount of principal paid in the period.

The principal amount paid in the period is applied to the outstanding loan balance. Therefore, the current loan balance, minus the principal amount paid in the period, results in the new outstanding loan balance, which is used to calculate the interest for the next period.

> **Warning**
>
> Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report, either to the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD).

## Comparing Amortized Loans, Balloon Loans, and Revolving Debt

While these loans share similarities, there are key differences you should know before choosing.

### Amortized Loans

Amortized loans are typically paid off over time with equal payments in each period. Amortized loans have an amortization schedule in which a portion of each fixed monthly payment comprises the [monthly interest](https://www.investopedia.com/mortgage/mortgage-rates/how-to-find-best-rates/) and the principal loan balance.

Borrowers can make extra payments to reduce the principal, but monthly payments stay the same. In other words, paying extra on an amortized loan reduces the [loan](https://www.investopedia.com/the-best-ivf-loans-8763813) balance, shortens the loan term, and saves you interest, but it does not change the monthly payment.

### Balloon Loans

[Balloon loans](https://www.investopedia.com/terms/b/balloonloan.asp) typically have a short term, with only part of the principal amortized during that time. At the end of the term, the remaining balance is due as a final repayment, which is generally large—at least double the amount of previous payments.

### Revolving Debt (Credit Cards) 

Credit cards are a common type of revolving debt that lets you borrow up to a set limit. In other words, you can no longer borrow from a revolving credit line if you have reached your credit limit.

Paying down some of your credit balance increases your available credit by that amount. As a result, a revolving credit allows you to pay off and borrow again up to your credit limit indefinitely.

Credit cards work differently from amortized loans because they don't have set payment amounts or a fixed loan amount. Credit card [minimum monthly payments](https://www.investopedia.com/terms/m/minimum-monthly-payment.asp) typically do not include any principal, meaning the payment only covers the monthly interest cost.

> **Important**
>
> Amortized loans apply each payment to both interest and principal, initially paying more interest than principal until eventually that ratio is reversed.

## Amortization Loan Table Example

An amortization table displays the calculations of an amortized loan, listing relevant balances and dollar amounts for each period. In the example below, each row in the table represents one period.

The columns include:

*   The payment date
*   Principal portion of the payment
*   Interest portion
*   Total interest paid to date
*   Ending outstanding balance

The following table excerpt is for the first year of a 30-year [fixed-rate mortgage](https://www.investopedia.com/terms/f/fixed-rate_mortgage.asp) for $165,000 with an annual interest rate of 4.5%

![Image](https://www.investopedia.com/thmb/uy_dXYeXKTe3Idpt-K0cbaa0CEY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Amortized_Loan_Oct_2020-01-3a606fa9285943098248ac92e8d03b40.jpg)

**

> **Tip**
>
> Remember, applying an extra principal payment to an amortized loan, like a fixed-rate mortgage or auto loan, does not reduce the amount of your future monthly payments. The monthly payments remain fixed throughout the life of amortized loans unless you modify the loan terms or refinance the loan.

## What Is the Simple Meaning of Amortized?

Amortized typically refers to a method of paying down a loan, such as a [fixed-rate mortgage](https://www.investopedia.com/ask/answers/082616/whats-difference-between-fha-and-conventional-loans.asp), by making fixed, periodic payments comprised of a portion going towards the monthly [interest](https://www.investopedia.com/what-is-the-average-personal-loan-interest-rate-8558877) and the remaining to the principal loan balance.

## Can I Pay Off an Amortized Loan Early?

Yes. To pay off an amortized loan early, you can make payments more frequently or make principal-only payments. Since the interest is charged on the principal, [making extra payments](https://www.investopedia.com/extra-payments-affect-future-personal-loan-payments-7973996) lowers the principal amount that can accrue interest. Before making extra principal payments, review your loan agreement to see if your lender charges an early payoff penalty fee.

## How Can I See How Much of My Payment Is Interest?

Your [lender](https://www.investopedia.com/the-best-va-loan-lenders-11697437) should provide an amortization schedule showing how much of each payment will comprise interest versus principal. You can also request a schedule from your [lender](https://www.investopedia.com/the-best-mortgage-lenders-11714101).

## Do I Pay More Interest at the Beginning of My Loan or the End?

[Amortized loans](https://www.investopedia.com/articles/personal-finance/100914/private-student-loans-international-students.asp) typically start with payments more heavily weighted toward interest payments.

## The Bottom Line

Amortized loans involve scheduled payments that cover both interest and principal, with initial payments focused more on interest than principal. Over time, this balance shifts, reducing future interest charges. Making additional principal payments can shorten the loan's term and save money on interest, though it won't alter your monthly payment amount. Utilize an amortization schedule to clearly understand how each payment impacts your interest and principal over the loan's duration.  

> **Article Sources**
>
> 1.  Experian. "[What Is an Amortized Loan?](https://www.experian.com/blogs/ask-experian/what-is-amortized-loan/)"
>     
> 2.  Federal Trade Commission Consumer Advice. "[Mortgage Discrimination](https://consumer.ftc.gov/articles/mortgage-discrimination)."
>     
> 3.  Consumer Financial Protection Bureau. "[What Is a Balloon Payments? When Is One Allowed?](https://www.consumerfinance.gov/ask-cfpb/what-is-a-balloon-payment-when-is-one-allowed-en-104/)"
>     
> 4.  MyCreditUnion.gov. "[Paying Off Credit Cards](https://mycreditunion.gov/manage-your-money/consumer-loans-credit-cards/paying-credit-cards)."