What is an Amortized Loan? Meaning & How It Works

What are Amortized Loans?

Introduction

When you take a loan, your monthly payments aren’t just about repaying the borrowed amount they also include interest spread over the loan tenure. Most personal and home loans in India follow an amortised structure, where your Equated Monthly Instalment (EMI) remains fixed while the proportion of principal and interest changes over time.

Understanding how amortisation works gives you better control over your repayment plan, helping you manage cash flows and make smarter borrowing decisions.

Table of Contents

1. What does "amortized loan" mean?
2. How does amortization work in loans?
3. Amortized vs unamortized loan – what's the difference?
4. Why amortized loans typically suit most personal loan borrowers?
5. How to check your amortization schedule
6. Conclusion
7. FAQ

What Does "Amortised Loan" Mean?

An amortised loan is a loan where you repay the principal (the amount borrowed) and the interest through regular, equal monthly payments over a fixed period.

Each EMI contributes towards both reducing your outstanding loan balance and covering the interest charged by the lender.

Here's what makes amortised loans distinct: your monthly payment amount remains constant throughout the loan tenure, but the split between interest and principal changes with each payment.

Initially, a larger portion goes towards interest. As you continue making payments, more of your EMI goes towards reducing the principal amount.

Banks calculate your EMI using three factors: the loan amount (principal), the interest rate, and the loan tenure (in months). This calculation ensures that by the end of your repayment period, both the principal and all interest charges are fully paid off.

How Does Amortisation Work in Loans?

Loan amortisation follows a systematic process where each payment reduces your debt progressively.

When you take an amortised loan of, say, ₹15 lakh at 11% interest for 5 years, your EMI might be approximately ₹32,613. This amount stays fixed, but what happens behind the scenes changes every month.

The Interest-to-Principal Shift

During the first few months, the interest component is higher because you owe more principal. As you keep paying, the outstanding principal decreases, which means the interest calculated on that balance also reduces. Consequently, more of your EMI goes towards paying off the principal in later months.

Here's a simplified example showing the first three months of a ₹15 lakh loan at 11% annually over 60 months:

Notice how the interest portion decreases while the principal repayment increases, even though the EMI remains ₹32,700. By the final months of your loan, nearly your entire EMI goes towards principal repayment.

Amortised vs Unamortised Loan – What's the Difference?

Most personal loans in India are amortised, but it's helpful to understand the alternatives to see why amortisation works better for most borrowers.

For personal loan borrowers, amortised loans offer stability. You know your exact monthly commitment, and there's no large final payment to worry about. Unamortised structures suit businesses or borrowers with specific cash flow patterns, but they require careful financial planning.

Why Amortised Loans Typically Suit Most Personal Loan Borrowers?

Amortised loans have become the standard for personal borrowing in India for several practical reasons. These benefits align with how most salaried professionals and self-employed individuals manage their monthly budgets.

Predictable Monthly Budgeting

With a fixed EMI, you can plan your household budget accurately. This predictability helps you allocate funds for other expenses, savings, and investments without uncertainty.

Gradual Debt Reduction

Every payment you make reduces your principal balance. Unlike interest-only loans where your debt remains unchanged until the end, amortisation ensures steady progress

Regulatory Protection

RBI guidelines mandate transparency in amortised loan structures. Banks must provide you with a detailed amortisation schedule showing exactly how much interest and principal you'll pay each month.

Flexibility for Prepayment

Since 2018, RBI regulations allow borrowers to prepay personal loans without penalties. With an amortised loan, any additional payment you make directly reduces the principal, which lowers future interest charges.

Alignment with Income Patterns

Most Indian borrowers receive regular monthly income. An amortised EMI structure matches this income pattern perfectly.

How to Check Your Amortisation Schedule

Your amortisation schedule is a detailed breakdown of every payment you'll make throughout your loan tenure. Banks are required to provide this to you, and it's a valuable tool for financial planning.

Where to Access Your Schedule

Most banks provide it at the time of loan sanction—check your loan agreement documents. If you need it later, log into your net banking portal and navigate to the loan section. They also have dedicated mobile banking apps where you can download your schedule as a PDF.

Alternatively, visit your nearest branch and request a printed copy. Customer service representatives can generate this for you within minutes. You may also receive monthly statements showing your current position within the amortisation schedule.

Understanding the Schedule Columns

Your amortisation schedule typically includes these columns:

• Month/EMI Number: Sequential payment number (1 to 60 for a 5-year loan)
• Opening Balance: Outstanding principal at the start of that month
• EMI Amount: Your fixed monthly payment
• Interest Component: Portion of EMI going towards interest
• Principal Component: Portion of EMI reducing your loan balance
• Closing Balance: Outstanding principal after that month's payment

Using the Schedule for Planning

Review your schedule to see how much interest you'll pay over the entire loan tenure. This total interest figure helps you evaluate whether prepayment makes financial sense.

If you're planning to make a lump sum prepayment, check which month you're currently in—the earlier you prepay, the more interest you save.

Many banks also provide online where you can simulate different loan amounts, tenures, and personal loan interest rates.

Conclusion

Understanding how each EMI is split between interest and principal gives you a clear view of your loan. It helps you plan better — whether you’re taking a new loan or deciding when to make prepayments on an existing one.

The amortisation schedule acts like a simple tracker. It shows how much you’ve repaid, how much remains, and how your payments will change over time.

With RBI regulations in place, you can also be sure that the repayment structure follows clear and transparent rules.

For personalised guidance on loan options and repayment strategies, Kotak Mahindra Bank offers transparent amortised personal loans with comprehensive support throughout your borrowing journey.