When you’re borrowing money or investing, understanding how interest works is crucial. Two key financial concepts—amortization and compound interest—play very different roles in shaping what you pay or earn over time.
So, which one costs more? Let’s break it down.
💸 What Is Amortization?
Amortization refers to paying off a loan through scheduled, equal payments that include both interest and principal. Over time, more of each payment goes toward the principal, and less toward interest.
Example:
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$10,000 loan at 6% over 5 years
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Monthly payment: ~$193.33
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Total interest paid: ~$1,600
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You know upfront how much you’ll pay in total.
🧾 Amortization = predictable, declining interest payments over time.
📈 What Is Compound Interest?
Compound interest means interest is calculated not only on the initial principal but also on previously earned interest. It’s commonly used in savings accounts, credit cards, and investments.
Example:
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$10,000 credit card balance at 20% compounded monthly
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If unpaid for 1 year:
You’d owe $12,429, or $2,429 in interest
🌀 Compound interest = exponential growth (or cost) over time.
⚖️ So, Which One Costs More?
| Factor | Amortization | Compound Interest |
|---|---|---|
| Predictability | Fixed payment schedule | Varies depending on compounding |
| Total Interest Over Time | Generally lower | Can be significantly higher |
| Use Case | Mortgages, auto loans, personal loans | Credit cards, investments, savings |
💥 In most debt scenarios:
Compound interest costs more.
Especially if the balance isn’t paid off regularly.
🔍 Why the Difference?
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With amortization, your balance decreases over time, so the interest charged shrinks.
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With compound interest, your balance may grow (if not paid down), so you pay interest on interest.
🧠 Bottom Line
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If you’re borrowing: amortization is almost always cheaper than compound interest.
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If you’re saving/investing: compound interest works in your favor—helping your money grow faster.