Lesson 10 of 25 · 6 min

Amortization as a schedule, and why early payments are mostly interest

The first year of a schedule is mostly paying for time already used, which is why the balance barely moves.

An amortization schedule, the month-by-month split of each installment into interest and principal, is front-loaded the other way from depreciation. Early payments are mostly interest because the balance is still large. Track 1 lesson 14 is daily accrual; this lesson does not re-teach that clock. It shows the monthly version as a table, and why the first year retires less of the loan than the cash leaving the account suggests.

Tallow Yard Autos finances $26,840 at an illustrative 7.65 percent for 72 months. The installment is $466.02. First-month interest is $26,840 × 0.0765 ÷ 12 = $171.11. Principal retired is $466.02 − $171.11 = $294.91. The cash that left the account was $466.02. The claim that moved was $294.91.

Year 1 is twelve of those splits. Twelve payments total $5,592.22, of which interest is $1,926.50 (34.4 percent) and principal is $3,665.72. A third of the year's cash was time already used. The balance at the end of month 12 is $26,840 − $3,665.72 = $23,174.28. The car's mark, from lesson 9's kind of schedule, has been falling on a different clock. Lesson 11 puts the two clocks on the same page.

Track 5 lesson 15 reconstructs an interest leg by hand on a securities line. An amortization table is that reconstruction, pre-printed, for a fixed-rate installment loan. Each row is last month's balance times r, subtracted from PMT, with the remainder applied to principal. Early rows are mostly the first of those two multiplications.

The installment is constant. The interest slice is not. Early months buy time. Later months buy principal. The table is the only place that split is visible.

Key terms

Amortization schedule: The month-by-month split of each installment into interest on the outstanding balance and principal retired.
Interest slice: Outstanding balance times the monthly rate. Large when the balance is large, which is the beginning.
Principal retired: The installment minus that month's interest slice. The only part that lowers LTV from the numerator side.

Worked example

Year 1 of a 72-month table

Tallow Yard Autos. Principal $26,840, illustrative 7.65 percent APR, 72 months.

Installment: $466.02
First-month interest: $171.11
First-month principal: $294.91
Twelve payments: $5,592.22
Of which interest: $1,926.50
Of which principal: $3,665.72

Year 1 moved $5,592.22 of cash and $3,665.72 of claim. The gap is the interest leg, and it is largest when the balance is largest.

Check yourself

Principal $19,880, illustrative 7.1 percent APR, 60 months. What is the installment, the first-month split, and year-1 interest as a share of twelve payments?

An amortization schedule is the everyday version of an interest leg: most of an early payment is accrual, the reconstruction Track 5 lesson 15 does by hand. Open How to recompute an interest leg by hand →

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.