Understanding Loan Amortization: Where Your Payments Actually Go

What Is Loan Amortization? Amortization is the process of paying off a loan through regular installments over time. Each payment is divided between interest charges and principal reduction. While your total monthly payment stays the same throughout the loan term, the proportion going to interest versus principal changes dramatically over time. How Amortization Works In the early years of a loan, a large portion of each payment goes toward interest. This is because interest is calculated on the remaining balance, which is highest at the beginning. As you gradually pay down the principal, less…