What Is Loan Amortization?

How amortization works

Each month: interest = balance × (annual rate ÷ 12). The fixed payment minus that interest = principal. Next month, the balance is slightly lower, so interest is slightly less, and slightly more goes to principal. The shift accelerates over time.

Example: $20,000 personal loan at 10%, 5 years

Monthly payment: $425. Look at how the split shifts:

• Month 1: $167 interest, $258 principal.
• Month 12: $138 interest, $287 principal.
• Month 30: $84 interest, $341 principal.
• Month 60 (final): $4 interest, $421 principal.

Total paid: $25,496. Interest paid: $5,496.

Why amortization matters

• Early extra payments save much more interest than late ones.
• Refinancing late in a loan often doesn't save as much as it seems.
• Your balance drops slowly at first — even after 25% of the term, you may have only paid down 12% of the principal on a long loan.
• Knowing the schedule helps you plan refinances, sales, or extra payments.

Amortizing vs non-amortizing loans

Most loans you'll encounter are amortizing — they pay off the principal as you go. Non-amortizing loans (interest-only mortgages, balloon loans) only require interest during the term, with the entire principal due at the end. They're rare and risky for primary residences.

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