Loan amortisation
Paying a loan off in equal repayments that move from mostly interest to mostly principal.
Loan amortisation is repaying a loan in equal instalments, each of which pays that period’s interest on the balance and puts the rest against the principal. The repayment is loan × r ÷ (1 − (1 + r)^−n), where r is the rate per period and n the number of repayments. An amortisation schedule lists every repayment’s interest, principal and remaining balance.
Because the balance falls with every repayment, the interest in each one falls too, and more of the same repayment goes to the principal. An extra repayment comes straight off the balance, which shortens the loan and cuts the interest on every repayment after it. Accountants also use amortisation for writing off intangible assets such as goodwill over time, so say loan amortisation when you mean repayments.
Worked example
$50,000 at 8.5% a year over five years is $1,025.83 a month. The first repayment is $354.17 of interest and $671.66 of principal; by the 60th, the interest is $7.21. Over the term the interest adds up to $11,549.54.
Common mistake
Treating the whole repayment as a business cost. The interest part is an expense — generally deductible in Australia where the borrowed money is used to earn assessable income — while the principal part pays back the loan and is not.
Grounded in ATO — Deductions for other operating expenses guidance. Figures last checked . General information, not tax advice.
Related terms
Balance sheet
What a business owns and owes on one date, and the equity left for its owner.
Interest-only loan
A loan whose repayments cover only the interest for a set period, so the balance does not fall.
Balloon payment
A lump sum left owing at the end of a loan, which makes the regular repayments smaller.
Offset account
A transaction account linked to a home loan whose balance is taken off the loan before interest is charged.
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Questions about this term
Loan amortisation: common questions
- What is an amortisation schedule?
- A table with one row per repayment showing its date, the payment, the interest, the principal and the balance left after it. It ends at zero on the last repayment, and its interest column is the figure a business keeps for its tax return.
- Why is so much of an early loan repayment interest?
- Interest is charged on what is still owed, and at the start you owe the most. As the balance falls, each repayment’s interest falls with it, so the same repayment pays off more principal every period until the last one.
- Does amortisation mean the same thing for a loan and for goodwill?
- The word is shared but the jobs differ. For a loan it means paying it down in instalments; for an intangible asset such as goodwill or intellectual property it means writing its cost off over a period of time, which is how business.gov.au’s glossary uses it.
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