The Ultimate Global Guide to Loan Amortization
Loan amortization is the systematic process of paying off a debt over time through regular installments. Unlike simple interest loans, amortized loans use a reducing balance method.
How the Math Works: The Formula
The standard amortization formula ensures that your payment stays the same while the ratio of interest to principal changes. This works for any currency:
Where M is the payment, P is principal, r is the periodic interest rate, and n is the number of payments.
Interest Rate Impact (Case Study)
The table below shows how a mere 1% difference in interest rates changes the total cost of a 100,000 unit loan over 20 years.
| Rate | Monthly Payment | Total Interest | Total Cost |
|---|---|---|---|
| 4% | 605.98 | 45,435.20 | 145,435.20 |
| 5% | 659.96 | 58,390.40 | 158,390.40 |
| 6% | 716.43 | 71,943.20 | 171,943.20 |
Optimization Strategy
Because interest is calculated on the current outstanding balance, making even a small extra principal payment early on can result in massive savings. This effectively "erases" future interest that hasn't even accrued yet.
Frequently Asked Questions
Does amortization work the same for all currencies?
Yes. Amortization is a mathematical process based on percentages. Whether you use Dollars, Euros, or Yen, the formula remains identical.
What is the "tipping point"?
This is the moment in your amortization schedule where your monthly payment starts contributing more to the principal than to the interest.