Amortization is the practice of repaying debt overtime in regular interest and principal installments sufficient to pay off the loan in full by the maturity date. In the early stages of a mortgage or vehicle loan, a greater percentage of the flat monthly payment goes toward interest. With each payment, a larger portion of the payment is applied to the loan’s principle.
Most current financial calculators, spreadsheet software programs such as Microsoft Excel, and online amortization charts may be used to calculate amortization. The outstanding loan balance is the first item on the amortization schedule. The interest payment is determined by multiplying the interest rate by the outstanding loan balance and then dividing it by twelve for monthly installments. The entire monthly payment (a fixed sum) minus the interest payment for that month equals the amount of principle owing in that month.