Amortization is the process of paying off a loan through regular scheduled payments. Each EMI covers both interest and a portion of principal, with the interest share decreasing and principal share increasing over time.
In detail
In an amortized loan every EMI is identical but what it consists of changes each month. Early EMIs are mostly interest because the outstanding principal is large. As you repay principal, the interest portion shrinks and the principal portion grows. This is why prepaying a loan in the early years saves dramatically more interest than prepaying later -- you eliminate a large principal balance that would have generated years of compounding interest.
Formula
EMI = P x r x (1+r)^n / [(1+r)^n - 1]
Where: P = Principal, r = Monthly interest rate, n = Number of months
Interest in month m = Outstanding balance x monthly rate
Principal in month m = EMI - Interest
Real-life example
🇮🇳 India example
On a Rs 30 lakh home loan at 8.5% for 20 years (240 months), EMI = Rs 26,035. Month 1: interest = Rs 21,250, principal = Rs 4,785. Month 120 (year 10): interest = Rs 15,620, principal = Rs 10,415. Month 240 (last): interest = Rs 182, principal = Rs 25,853.
Frequently asked questions
Why does more interest get paid in the early years of a loan? ▼
Because interest is calculated on the outstanding principal each month. Early in the loan, the principal balance is highest, so interest is highest. As principal reduces through repayments, the monthly interest charge falls progressively.
What is a loan amortization schedule? ▼
A complete table showing every EMI broken into principal and interest components, plus the outstanding balance after each payment. ThriftRupee EMI calculators generate this automatically.
Does prepayment reduce EMI or tenure? ▼
You can choose either. Reducing tenure (keeping EMI constant) saves more total interest because the loan closes faster. Reducing EMI (keeping tenure constant) frees up monthly cash flow. Reducing tenure is usually the mathematically superior choice.