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Amortization

Also called: loan amortization

Amortization is the gradual payoff of a loan through regular payments, each split between interest and principal. Early payments carry the largest share of interest; as the balance falls, more of each payment goes to principal until the loan is repaid.

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How it works

On an amortizing loan, the payment is set so the balance reaches zero by the end of the term. Each period, interest is charged on the principal still owed, and the rest of the payment reduces principal. Because the balance is largest at the start, the first payments hold the most interest. As principal shrinks, so does the interest, and more of the same payment goes toward the debt itself.

A table showing the split for every payment is called an amortization schedule. It reveals how much principal remains at any point, which matters if you might sell, refinance, or pay off early. At the halfway point of the term, less than half the principal has been repaid. The schedule also shows the cost of time: a longer term lowers the payment but adds interest over the life of the loan.

That pattern describes simple-interest loans, where interest is based on the balance actually owed. Some loans use precomputed interest instead, which is calculated up front and added at the start; extra or early payments may not cut interest the same way on those. A lender can confirm which method a loan uses and how extra payments are applied.

Try it with your own numbersLoan Payment CalculatorFree loan payment calculator for fixed-rate car, personal and consolidation loans. See the monthly payment, total interest and how the term changes both.

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Sources and further reading

Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.

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