Understanding Loan Amortization
When you take out a fixed-rate loan, your monthly payment stays the same — but how that payment is applied changes every month. That schedule is called amortization.
What amortization means
Amortization is the process of paying off debt in equal installments over time. Each payment covers two parts: interest (the cost of borrowing) and principal (the amount you actually owe).
Why early payments are mostly interest
Interest is calculated on your remaining balance. At the start of a loan, the balance is highest, so most of your payment goes to interest. As the balance shrinks, more of each payment reduces principal.
The standard formula
Lenders use a fixed monthly payment formula based on principal, annual interest rate, and term in months. The same math applies to auto loans, personal loans, and many mortgages with fixed rates.
Compare before you borrow
Small changes in rate or term can add thousands to total cost. Always compare monthly payment and total amount paid — not just the rate advertised.
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