How Loan Amortization Works with EMI

Loan amortization is a critical concept for understanding how Equated Monthly Installments (EMIs) work in repaying loans in Canada and the US. It breaks down each payment into principal and interest, showing how the loan balance decreases over time.

This guide explains the mechanics of loan amortization with EMI, offering insights for borrowers in Toronto, Vancouver, New York, and beyond. Use our free EMI calculator to generate your own amortization schedule and plan your repayments effectively.

Loan amortization is the process of paying off a loan through regular payments over a specified period, where each payment covers both principal and interest. An amortization schedule details each payment, showing:

• The portion of each payment that goes toward interest.
• The portion that reduces the principal.
• The remaining loan balance after each payment.

Amortization ensures that the loan is fully paid off by the end of the term, with payments structured to balance interest and principal repayment.

EMI, or Equated Monthly Installment, is a fixed monthly payment calculated using the formula: EMI = P × r × (1 + r)^n / [(1 + r)^n - 1], where:

• P is the principal loan amount.
• r is the monthly interest rate (annual rate ÷ 12 ÷ 100).
• n is the number of monthly payments.

In an amortization schedule, each EMI payment is split between interest (calculated on the remaining principal) and principal repayment. Early in the loan term, a larger portion of the EMI goes toward interest, while later payments focus more on reducing the principal, gradually lowering the outstanding balance to zero.

The chart below illustrates the amortization of a $20,000 loan at 5% annual interest over 3 years (36 months), showing how the EMI ($599.42) is split between principal and interest over time.

Here’s a sample amortization schedule for the first 5 months of a $20,000 loan at 5% annual interest over 3 years in Canada and the US:

This schedule demonstrates how the interest portion decreases and the principal portion increases with each EMI payment, reducing the loan balance over time.

Ready to create your own amortization schedule? Use our free EMI calculator to test scenarios for your loan in Canada or the US.