In short: amortization = fixed payments that slowly kill a loan — interest first, principal second. Plan your loan free →

The annuity formula

For a standard fixed-rate loan, the monthly payment comes from the annuity formula:

A = P × r(1+r)n / ((1+r)n − 1)
where P = loan amount, r = interest rate per period, n = number of payments.

Worked example: borrow €200,000 at 3% annual interest over 20 years. Monthly rate r = 0.03 ÷ 12 = 0.0025; payments n = 240. Plugging in: A ≈ €1,109/month. Over 20 years you pay about €266,200 total — roughly €66,200 of it interest.

Why early payments are mostly interest

Interest is always charged on the outstanding balance, which is biggest at the start. So in year one, the lion's share of your €1,109 goes to the bank as interest, with only a sliver reducing principal. As the balance shrinks, the split flips — by the final years, almost the whole payment attacks principal. This schedule of every payment's split is called an amortization schedule, and lenders must typically show it to you before you sign.

Amortization beyond loans

The same word appears in accounting, where it means spreading the cost of an intangible asset (a patent, software licence, goodwill) over its useful life — the twin of depreciation, which applies to physical assets. Same idea, different world: big costs, sliced into manageable periods.

❓ Amortization FAQs

What is amortization in simple terms?

Paying off a loan through fixed regular payments, where each payment covers that period's interest first and reduces the borrowed amount with the rest.

What is the loan amortization formula?

A = P × r(1+r)^n / ((1+r)^n − 1): P is the loan amount, r the rate per period, n the number of payments. It gives the fixed payment that clears the loan exactly.

Why do early payments go mostly to interest?

Interest is charged on the outstanding balance, which is largest at the beginning. As the balance falls, more of each fixed payment goes to principal.

What is an amortization schedule?

A payment-by-payment table showing the interest portion, principal portion and remaining balance — lenders usually provide one before you sign.

Related: What Is Compound Interest? · What Is Gross vs Net Salary? · Free Loan Calculator

Examples are illustrative. Actual loan terms, fees and tax treatment vary by lender and country — always read the offer documents.