How Loan Amortization Works (With a Simple Example)

Ever wonder why, years into a mortgage, you've barely dented the balance? The answer is amortization — the schedule that governs how each payment is split between interest and principal. Understanding it helps you borrow smarter.

The basic idea

With a fixed-rate loan, you pay the same amount every month. But that fixed payment is divided differently over time:

• Interest = current balance × monthly rate. Early on the balance is large, so most of your payment is interest.
• Principal = whatever's left of the payment after interest. This chips away at the balance.

As the balance shrinks, the interest portion falls and the principal portion grows — so payments accelerate the payoff over time.

A simple example

Borrow $200,000 at 6% for 30 years. The fixed payment is about $1,199/month. In month 1:

• Interest = $200,000 × (6% ÷ 12) = $1,000
• Principal = $1,199 − $1,000 = $199

So your first payment reduces the balance by just $199! By the final years, almost the entire payment goes to principal. Over the full term you'd pay roughly $232,000 in interest — more than the loan itself.

Reading an amortization schedule

A schedule lists every payment with four columns: payment, principal, interest, and remaining balance. Scanning it shows exactly when you cross the halfway point (later than you'd think) and the total interest cost.

How extra payments help

Any extra you pay goes 100% to principal, which removes all the future interest that balance would have generated. Even small extras have an outsized effect — see our companion guide on extra payments.

See your own numbers

Our loan calculator builds a full amortization schedule (yearly or monthly) for any amount, rate and term, with a principal-vs-interest chart so you can see the split at a glance.

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