What is Amortization?

Understanding Amortization

Amortization is the process of spreading out a loan into a series of fixed payments over time. Each payment goes toward both the loan's principal and interest, with the exact split between them changing over time.

In the early stages of a loan, a larger portion of each payment goes towards interest. As time goes on, more of each payment goes towards the principal. This process continues until the loan is fully paid off at the end of its term.

Key Points

• The total payment amount typically stays the same throughout the loan term.
• In the beginning, you're paying more interest and less principal.
• Towards the end, you're paying more principal and less interest.
• Amortization schedules help you understand how much of your payment goes to principal vs. interest over time.

The Amortization Schedule

An amortization schedule is a complete table of periodic loan payments, showing the amount of principal and interest that comprise each payment until the loan is paid off at the end of its term.

This schedule is particularly useful because it helps you:

• Understand how much of each payment goes towards the principal vs. interest
• See how the loan balance decreases over time
• Identify when you'll have paid off certain percentages of your loan
• Evaluate the potential impact of making extra payments or refinancing
• Plan your long-term financial strategy more effectively