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What is amortization?

Amortization is paying off a loan in regular, equal payments over time. Each payment covers the interest that built up since the last one, and the rest reduces what you still owe (the principal).

Action level No action usually needed

Why you are seeing it
It appears on loan and mortgage documents, often as an amortization schedule.
Why it matters
It shows how each payment splits between interest and the principal you still owe, and why early payments on a long loan are mostly interest.
What should I do?
  • Look at an amortization schedule to see the interest, the principal and the balance left after each payment.
  • If your loan allows it, remember that extra money applied to principal early reduces the balance that later interest is charged on.
A common misunderstanding
Not every debt works this way: interest-only loans, balloon loans and credit cards have different payment patterns.

See an example below ↓

See where each payment goes

An example loan. Change the amount, rate or term.

Each payment is $608.44. In month 1, $100.00 of it is interest; by month 36, only $3.03 is.

Monthly payment
$608.44
Total interest over the loan
$1,903.79
Total paid back
$21,903.79
Payment 1$100.00 interest + $508.44 principal
Payment 36$3.03 interest + $605.41 principal
Selected payments
Payment #InterestPrincipalBalance left
1$100.00$508.44$19,491.56
2$97.46$510.98$18,980.58
3$94.90$513.54$18,467.04
18$55.01$553.43$10,448.58
36$3.03$605.41$0.00
  • Interest is charged on what is still owed, so it shrinks as the balance falls and more of each payment goes to principal.
  • Assumes a fixed rate and equal monthly payments made at the end of each month. Real lenders round to the cent, so printed totals can differ by a few cents.

An estimate for learning, under the assumptions shown. Not financial advice, a quote or an offer.

How each payment is split

Each month the interest is the remaining balance times the monthly rate. Whatever is left of the payment goes to principal. Because the balance falls, next month's interest is a little smaller and a little more of the same payment goes to principal.

On a long loan such as a mortgage, the early payments are mostly interest. On a short loan the shift is much smaller, as the example shows.

A simple example

$20,000 at 6% for 36 months

Payment: $608.44 every month.

Month 1: $100.00 is interest and $508.44 is principal.

Month 36: $3.03 is interest and $605.41 is principal.

Total interest over the whole loan: $1,903.79.

Why it matters

  • An amortization schedule is the table of every payment, showing interest, principal and the balance left.
  • If your loan allows it, extra money applied to principal early reduces the balance that later interest is charged on.
  • Not every debt works this way. Interest-only loans, balloon loans and credit cards have different payment patterns.

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