Amortization is simply the schedule that shows how a loan gets paid off over time, one instalment at a time, with each payment split between two things: the principal you actually borrowed, and the interest charged on what you still owe.
The part most borrowers don't expect
Early in a standard amortizing loan, most of your payment goes to interest. Late in the loan, most of it goes to principal. The total payment can stay the same every month while the mix inside it shifts completely, because interest is calculated on your remaining balance, and that balance is largest at the very start.
A simplified example
Take a ₱120,000 loan at 24% effective annual interest over 12 months. A standard amortization schedule looks roughly like this:
| Month | Payment | Interest portion | Principal portion | Balance after |
|---|---|---|---|---|
| 1 | ₱11,330 | ₱2,400 | ₱8,930 | ₱111,070 |
| 6 | ₱11,330 | ₱1,260 | ₱10,070 | ₱58,590 |
| 12 | ₱11,330 | ₱222 | ₱11,108 | ₱0 |
Same monthly payment throughout. The interest portion falls from ₱2,400 in month one to ₱222 in month twelve, because there's far less balance left to charge interest on. This is how a true amortizing loan works, whether it's a bank mortgage, a car loan, or a personal loan priced on an effective rate.
Why this is not how add-on interest works
Bank personal loans in the Philippines are usually quoted with a monthly add-on rate, which charges interest on the original principal for the entire term, not the declining balance. That's a different calculation from true amortization, and it's exactly why a 1.25% add-on rate discloses as an effective rate above 30% a year. The full explanation, with real bank numbers.
Why it matters when you compare loans
- Two loans with identical monthly payments can cost very different totals if one amortizes on the declining balance and the other charges add-on interest on the full original amount throughout.
- Paying extra toward principal early saves more interest on a true amortizing loan than it does later in the term, because it shrinks the balance interest is calculated on sooner.
- The Disclosure Statement should show you the full schedule, not just the monthly figure. What it's required to include.