Guides

Reading an amortisation schedule, and what an extra payment really does

Why early payments are mostly interest, what the total interest figure tells you, how extra payments shorten a loan, and why your lender quotes a different number.

A loan quote is one figure — the monthly payment. The schedule is the honest version: what each payment is actually made of, and how slowly the balance moves at the start.

Every payment is two things

Interest is charged on what you still owe, so at the start it takes most of the payment and the balance barely moves. As the balance falls the interest falls with it, and more of the same payment goes to principal. The payment is flat; its composition is not.

This is why the first year of a long loan feels like nothing is happening. It is also why the schedule is worth printing before you sign.

The formula

For a fixed-rate loan with equal payments, the payment is the amount borrowed times the periodic rate, divided by one minus (one plus the periodic rate) raised to the power of minus the number of payments. The periodic rate is the annual rate divided by the number of payments per year.

Then, each period: interest is the outstanding balance times the periodic rate, and whatever remains of the payment reduces the balance.

What an extra payment does

An extra amount goes entirely against the balance. Because interest is charged on the balance, every unit you pay early removes all the interest that unit would have generated for the rest of the term — which is why small, regular extra payments shorten a long loan much more than people expect.

The regular payment does not fall. The term does. If you want a lower payment instead, that is a refinance or a restructure, not an overpayment.

Why the bank quotes something different

Fees, arrangement charges, day-count conventions, rounding, and a rate that compounds on a different cycle than it is charged on. A schedule built from the amount, rate and term is the arithmetic of the loan itself — excellent for comparing options and planning, not a substitute for the lender’s own statement.

Worth knowing

• Check whether early repayment carries a penalty before making extra payments. Some products charge for exactly the behaviour that saves you interest.
• This is general explanation, not financial advice.