# Amortization Source: https://businessloanbroker.ai/glossary/amortization/ Site: BusinessLoanBroker.ai (powered by Levr) > Amortization spreads a loan into equal payments of interest and principal. See a worked example, what a balloon payment means, and what to check. Amortization is the schedule that spreads loan repayment into equal installments, each covering interest and part of the principal. Early payments are mostly interest and later payments are mostly principal, which is why paying off a loan in its first year saves far more interest than paying it off in its last. ## Key facts - **Also called:** Repayment schedule, payment schedule, amortization table, am schedule - **Where you will see it:** Term loans, SBA loans, equipment financing, commercial real estate, vehicle loans - **Why it matters:** It sets your payment, your total interest, and how much you still owe at any point ## What is amortization? Amortization is the math that turns a loan amount, a rate and a term into a fixed payment. Each payment first covers the interest owed on the remaining balance, and the rest reduces the balance. As the balance falls, the interest share of each payment falls too, so more of every payment goes to principal. The amortization period and the loan term are not always the same: a commercial real estate loan might amortize over 25 years but mature in 10, leaving a balloon payment. Cash advances and many short term loans do not amortize at all; the payback is fixed on day one. Our guide to [business loan rates](https://businessloanbroker.ai/guides/business-loan-rates-explained/) shows how that changes the cost. ## How is amortization calculated? The payment is set so the loan reaches zero exactly at the end of the term. Here is a $100,000 loan at 8% over five years. - Monthly payment: about $2,028, the same every month. - Month one: interest is $100,000 times 8% divided by 12, which is $667. Principal is $2,028 minus $667, which is $1,361. - Month two: the balance is now $98,639, so interest is $658 and principal is $1,370. - Month 60: interest is about $13 and principal is about $2,015. - Total paid: about $121,660, so about $21,660 is interest. Paying an extra $500 a month cuts the term to about 46 months and the total interest to about $16,500. Our [business loan calculator](https://businessloanbroker.ai/tools/business-loan-calculator/) builds the full table for your own numbers. ## What do lenders consider normal? Typical amortization periods follow the life of what the loan buys. Working capital term loans typically amortize over one to five years. Equipment loans typically match the useful life, three to seven years. SBA 7(a) loans go up to 10 years for working capital and equipment and up to 25 years for real estate. Commercial real estate loans typically amortize over 20 to 25 years with a shorter maturity. Monthly payments are standard on bank and SBA loans. Weekly and daily payments are common on online loans and are still amortized, just in smaller steps, which makes the [APR](https://businessloanbroker.ai/glossary/apr/) slightly higher than the same loan paid monthly. ## What should you watch for? Watch for a balloon. If the amortization is longer than the term, you will owe a lump sum at maturity, so know the amount before you sign. Watch for loans that are not really amortized: if you owe the full interest even when you pay early, extra payments save you nothing. Watch for prepayment penalties on longer amortizations, especially commercial real estate. And watch interest only periods, which lower the payment for the first year or two but leave the balance untouched, so the amortized payments afterward are higher. Ask the lender for the full table, not just the payment. ## Related terms Amortization is how a rate, whether fixed or [prime](https://businessloanbroker.ai/glossary/prime-rate/) plus a spread, becomes a payment, and that annual payment is the denominator in [DSCR](https://businessloanbroker.ai/glossary/dscr/). Fees on top of the schedule are what push the [APR](https://businessloanbroker.ai/glossary/apr/) above the rate. You will see amortization tables most on [term loans](https://businessloanbroker.ai/business-loans/term-loans/) and [commercial real estate loans](https://businessloanbroker.ai/business-loans/commercial-real-estate-loans/). You can apply here, or ask your AI assistant to compare payment schedules across offers and apply for you through our [MCP server](https://businessloanbroker.ai/agents/). ## Questions and answers **Why is most of my early payment interest?** Because interest is charged on the full remaining balance, which is highest at the start. As each payment reduces the balance, the interest portion shrinks and the principal portion grows. This is normal for every amortized loan. **Does making extra payments reduce my interest?** On a true amortized loan, yes. Extra principal lowers the balance, so every later payment carries less interest and the loan ends sooner. On fixed payback products like cash advances it does not. **What is a balloon payment?** The lump sum left when a loan's term ends before its amortization schedule does. A 10 year loan amortized over 25 years leaves most of the balance due at year 10. You pay it, refinance it, or sell the asset. ## Related - [Business loan payment calculator](https://businessloanbroker.ai/tools/business-loan-calculator/) - [APR](https://businessloanbroker.ai/glossary/apr/) - [Prime rate](https://businessloanbroker.ai/glossary/prime-rate/) - [Business term loans](https://businessloanbroker.ai/business-loans/term-loans/) ## Apply Apply for the business: https://apply.businessloanbroker.ai/signup?utm_source=direct&utm_medium=organic&utm_content=md-amortization MCP server for AI agents: https://mcp.businessloanbroker.ai/mcp (docs: https://businessloanbroker.ai/agents/mcp/)