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Amortisation Explained Simply: How Your Loan Payments Are Split Between Interest and Principal


This content originally appeared on DEV Community and was authored by ming zhang

Amortisation Explained Simply: How Your Loan Payments Are Split Between Interest and Principal

When you take out a loan—whether it’s a mortgage, car loan, or personal loan—you’ll often hear the term “amortisation.” At first, it might sound like complicated financial jargon. But the idea is actually quite simple: amortisation is just the process of spreading out your loan repayments over time.

Understanding amortisation is crucial because it shows you exactly how much of your monthly payment goes toward interest (the bank’s charge for lending you money) and how much reduces your principal (the actual amount you borrowed). Let’s break it down step by step.

What Is Amortisation?

  • Principal: The original amount you borrow (say, \$200,000 for a home loan).
  • Interest: The cost of borrowing, usually expressed as an annual percentage rate (APR).
  • Amortisation: The schedule that determines how your loan balance decreases as you make regular payments.

With amortisation, you repay your loan in fixed instalments (monthly, weekly, or otherwise). Each instalment includes two parts:

  1. Interest Portion – The lender’s earnings.
  2. Principal Portion – The money that reduces your outstanding balance.

How Payments Are Split Over Time

At the beginning of your loan term, interest makes up a bigger portion of each payment because your outstanding balance is still high.

As time goes on:

  • Your principal gradually decreases with every payment.
  • Since interest is calculated on the remaining balance, the interest portion shrinks.
  • More of your payment starts going toward the principal.

This shifting balance is why amortisation schedules are so useful—they clearly show how the mix of interest and principal changes over time.

Example: \$200,000 Loan at 5% Interest Over 30 Years

  • Monthly payment: about \$1,073

  • First payment breakdown:

    • Interest: \$833
    • Principal: \$240

  • After 15 years:

    • Interest: ~\$416
    • Principal: ~\$657

  • Last payment: almost all principal, very little interest

👉 At the start, you’re mostly paying the bank. Toward the end, you’re mainly reducing your loan.

Why Understanding Amortisation Matters

  1. Better financial planning

  • You can see how much of your early payments go to interest vs. principal.

    1. Motivation to pay extra

  • Even small extra repayments (e.g., \$100/month) can save you thousands in interest.

    1. Loan comparison

  • Amortisation schedules help you compare loans of different lengths or interest rates.

    1. Smarter decisions

  • You’ll know whether refinancing or early payoff makes sense.

How to See Your Own Loan Breakdown

You don’t need to do the math yourself. Online tools like an Amortisation Calculator can instantly generate:

  • A detailed month-by-month repayment schedule
  • Graphs showing how interest and principal portions shift over time
  • Total interest paid vs. total principal repaid

This way, you can make informed decisions before committing to a loan or planning extra repayments.

Key Takeaways

  • Amortisation is simply the process of repaying a loan in fixed instalments.
  • Early payments go mostly to interest; later payments go mostly to principal.
  • Understanding your amortisation schedule helps you save money and plan better.
  • Use an online calculator to explore repayment options and see the impact of extra payments.

👉 The next time you make a loan payment, remember: part of it goes to reduce your debt, and part goes to pay the cost of borrowing. Knowing the balance between the two gives you control over your financial future.


This content originally appeared on DEV Community and was authored by ming zhang