What is Loan Amortization?
Loan amortization is the process of paying off a debt over time through regular payments. Each payment is split between the principal (the original amount borrowed) and the interest (the cost of borrowing). As you make payments, the balance of your loan decreases, and the portion of your payment going towards the principal increases.
How Loan Amortization Works
- Your lender determines your interest rate and loan term
- A fixed monthly payment is calculated based on these factors
- Early payments mostly go towards interest
- As the loan balance decreases, more of each payment goes towards the principal
- By the end of the loan term, you've paid off both the principal and all the interest
Why Loan Amortization Matters
- Helps you understand the true cost of borrowing
- Allows you to see how much of each payment goes to principal vs. interest
- Useful for comparing different loan options
- Can help you decide whether to make extra payments or refinance
- Essential for budgeting and long-term financial planning