To amortize a loan

When you borrow money, whether for a home, a car, or a personal project, you typically repay it over time through by making equal, fixed payments. But have you ever wondered exactly how each payment is divided between interest and principal, or how your loan balance decreases year by year?

Amortization refers to the gradual repayment of a loan through a series of fixed payments.
Each payment you make includes two parts:

1. Interest – the cost of borrowing money

2. Principal – the actual amount that reduces your loan balance

Even though the amount paid remains constant, the ratio of principal to interest varies over time.

Assume:

• Loan amount: $100,000

• Term: 5 years

• Interest rate: 9%

• Payment frequency: annual

• Fixed payment each year: $25,709

In the first year, most of your payment goes toward interest. But as time goes on and your remaining balance decreases, you pay less interest and more principal. (You pay less interest each year, more of your fixed payment goes to toward paying down the loan).

The balance, after the last payment, is exactly $0.

Note: This sheet uses modern Excel formulas to make the schedule dynamic. That means the schedule automatically updates itself whenever the loan amount, interest rate, or duration is changed.

The understanding of loan amortization:

• It helps us to understand how much interest you’re really paying.

• It allows us to compare loans and decide whether refinancing is worth it.

• It shows how much equity (ownership) we're building if the loan is tied to an asset, like a house.