Understanding Amortization: Where Does Your EMI Go?
Learn how loan amortization works, why you pay more interest early on, how to read an amortization schedule, and strategies to save on total interest paid.
Every month you pay EMI, but do you know where that money actually goes? In the early years, most of it goes to the bank as interest. Understanding amortization can save you lakhs in interest.
What is Amortization?
Amortization is how your loan is repaid over time through equal EMIs. Each EMI has two components:
- Principal: Reduces your loan balance
- Interest: Bank's profit on the outstanding loan
The ratio between these two changes dramatically over the loan tenure.
The Shocking Reality of Early EMIs
₹50 lakh home loan, 8.5% interest, 20 years
- EMI: ₹43,391/month
| EMI # | Month | Interest | Principal | % to Interest |
|---|---|---|---|---|
| 1 | Jan Y1 | ₹35,417 | ₹7,974 | 82% |
| 12 | Dec Y1 | ₹34,684 | ₹8,707 | 80% |
| 60 | Dec Y5 | ₹30,462 | ₹12,929 | 70% |
| 120 | Dec Y10 | ₹22,941 | ₹20,450 | 53% |
| 180 | Dec Y15 | ₹12,303 | ₹31,088 | 28% |
| 240 | Dec Y20 | ₹305 | ₹43,086 | 1% |
In the first EMI, 82% goes to interest—only 18% reduces your loan!
Calculate your amortization: Use our EMI Calculator to see the full breakdown.
Why Does This Happen?
The Interest Calculation Formula
Interest is calculated on the outstanding balance:
Monthly Interest = Outstanding Balance × (Annual Rate / 12)
Year 1: Outstanding = ₹50 lakh → Monthly interest = ₹50L × (8.5%/12) = ₹35,417
Year 10: Outstanding = ₹32.4 lakh → Monthly interest = ₹32.4L × (8.5%/12) = ₹22,941
Year 20: Outstanding = ₹43,086 → Monthly interest = ₹43K × (8.5%/12) = ₹305
As principal reduces, interest reduces too.
Reading an Amortization Schedule
Year-by-Year Summary
| Year | Opening Balance | Principal Paid | Interest Paid | Closing Balance |
|---|---|---|---|---|
| 1 | ₹50,00,000 | ₹1,04,184 | ₹4,16,508 | ₹48,95,816 |
| 2 | ₹48,95,816 | ₹1,13,394 | ₹4,07,298 | ₹47,82,422 |
| 3 | ₹47,82,422 | ₹1,23,419 | ₹3,97,273 | ₹46,59,003 |
| 5 | ₹44,03,903 | ₹1,46,222 | ₹3,74,470 | ₹42,57,681 |
| 10 | ₹32,37,516 | ₹2,23,571 | ₹2,97,121 | ₹30,13,945 |
| 15 | ₹17,29,098 | ₹3,41,649 | ₹1,79,043 | ₹13,87,449 |
| 20 | ₹43,086 | ₹43,086 | ₹305 | ₹0 |
Total over 20 years:
- Principal: ₹50,00,000
- Interest: ₹54,13,840
- Total paid: ₹1,04,13,840
You pay more in interest than the actual loan amount!
The First 5 Years: Where Your Money Went
For ₹50 L loan, 20 years at 8.5%:
| Period | Total EMIs Paid | Principal Repaid | Interest Paid | Loan Balance |
|---|---|---|---|---|
| End of Year 1 | ₹5,20,692 | ₹1,04,184 | ₹4,16,508 | ₹48.96 L |
| End of Year 3 | ₹15,62,076 | ₹3,41,003 | ₹12,21,073 | ₹46.59 L |
| End of Year 5 | ₹26,03,460 | ₹5,96,097 | ₹20,07,363 | ₹44.04 L |
After 5 years of paying ₹26 lakh:
- Only ₹5.96 L went to principal
- ₹20.07 L went as interest (77%!)
- Loan balance is still ₹44 L (88% remaining)
This is why prepayments in early years have maximum impact.
Impact of Loan Tenure on Amortization
₹50 Lakh Loan at 8.5%: Different Tenures
| Tenure | EMI | Total Interest | Interest as % of Loan |
|---|---|---|---|
| 10 years | ₹62,087 | ₹24,50,440 | 49% |
| 15 years | ₹49,228 | ₹38,61,040 | 77% |
| 20 years | ₹43,391 | ₹54,13,840 | 108% |
| 25 years | ₹40,262 | ₹70,78,600 | 142% |
| 30 years | ₹38,446 | ₹88,40,560 | 177% |
30-year loan costs ₹88 L in interest—1.77x the loan amount!
EMI vs Total Cost Trade-off
| Tenure | EMI | Total Cost | Trade-off |
|---|---|---|---|
| 15 vs 20 years | +₹5,837/month | -₹15.53 L interest | Worth it if affordable |
| 20 vs 25 years | +₹3,129/month | -₹16.65 L interest | Significant savings |
Lower EMI = higher total cost. Choose shortest affordable tenure.
How Interest Rate Affects Amortization
₹50 L, 20-Year Loan at Different Rates
| Interest Rate | EMI | Total Interest | Year 1 Interest % |
|---|---|---|---|
| 7.0% | ₹38,765 | ₹43,03,600 | 78% |
| 8.0% | ₹41,822 | ₹50,37,280 | 80% |
| 8.5% | ₹43,391 | ₹54,13,840 | 82% |
| 9.0% | ₹44,986 | ₹57,96,640 | 83% |
| 10.0% | ₹48,251 | ₹65,80,240 | 85% |
1% rate increase adds ₹11+ lakh to total interest!
Higher rates mean:
- Higher EMI
- More interest in early years
- Slower principal reduction
Strategies to Optimize Amortization
1. Make Prepayments Early
Impact of ₹2 L prepayment at different times:
| Prepayment Timing | Interest Saved | Tenure Reduction |
|---|---|---|
| Year 1 | ₹6.8 L | 34 months |
| Year 5 | ₹5.2 L | 28 months |
| Year 10 | ₹3.1 L | 20 months |
| Year 15 | ₹1.3 L | 12 months |
Same ₹2 L saves 5x more if paid in Year 1 vs Year 15.
2. Choose Shorter Tenure
| Original | New | EMI Change | Interest Saved |
|---|---|---|---|
| 20 years | 15 years | +₹5,837 | ₹15.53 L |
| 25 years | 20 years | +₹3,129 | ₹16.65 L |
If you can afford ₹6,000 more monthly, switch from 20 to 15 years.
3. Refinance at Lower Rate
If rates have dropped by 1%+:
| Scenario | Original | After Refinance | Savings |
|---|---|---|---|
| Rate | 9.5% | 8.5% | 1% |
| EMI (₹40L, 15 years left) | ₹41,767 | ₹39,382 | ₹2,385/month |
| Remaining interest | ₹35.18 L | ₹30.89 L | ₹4.29 L |
4. Increase EMI With Income
| Year | Income | EMI | EMI as % Income |
|---|---|---|---|
| 1 | ₹1 L | ₹43,391 | 43% |
| 5 | ₹1.5 L | ₹43,391 | 29% |
| 5 (increased) | ₹1.5 L | ₹55,000 | 37% |
Increase EMI with salary hikes to accelerate principal repayment.
Understanding Part-Prepayment Impact
When you prepay ₹1 lakh:
- Entire amount reduces principal
- Next month's interest calculated on lower balance
- Each subsequent EMI has higher principal component
- Loan closes earlier
Example: ₹1 L Prepayment in Year 2
Before prepayment:
- Balance: ₹48.96 L
- Remaining interest: ₹52.93 L
- Remaining tenure: 228 months
After prepayment:
- Balance: ₹47.96 L
- Remaining interest: ₹49.53 L
- Remaining tenure: 220 months
Result: ₹3.4 L interest saved, 8 months earlier closure.
The Break-Even Analysis
When does principal = interest in your EMI?
| Loan Tenure | Break-Even Year | Explanation |
|---|---|---|
| 10 years | Year 5 | After 50% tenure |
| 15 years | Year 8 | After 53% tenure |
| 20 years | Year 12 | After 60% tenure |
| 25 years | Year 16 | After 64% tenure |
For a 20-year loan, you cross the halfway point (principal > interest) only in Year 12!
Reading Your Bank's Amortization Schedule
Most banks provide amortization schedules. Here's how to read them:
| Column | What It Shows | Why It Matters |
|---|---|---|
| EMI # / Month | Payment sequence | Track progress |
| Opening balance | Loan at start of month | Your liability |
| Interest component | Bank's earning | Minimize this |
| Principal component | Your wealth building | Maximize this |
| Closing balance | Loan at end of month | Track reduction |
Request this schedule when taking a loan. Many banks provide it in net banking.
Conclusion
Understanding amortization reveals the true cost of loans:
| Key Insight | What It Means |
|---|---|
| Early EMIs are mostly interest | Prepay early for maximum impact |
| Longer tenure = higher total cost | Choose shortest affordable tenure |
| Interest rate matters a lot | Refinance if rates drop 1%+ |
| Prepayment is powerful | Even small prepayments save lakhs |
Action items:
- Get your amortization schedule from the bank
- See how much goes to interest vs principal
- Plan prepayments or EMI increases
- Track your loan closure date
The more you understand where your money goes, the faster you can become debt-free.
Calculate your loan amortization: Use our EMI Calculator to see year-by-year breakdown of your loan.