When you take out a loan, whether for a house, car, or business, you repay it over time. This repayment process is called amortization. Each payment includes two parts: principal (the loan balance) and interest (the cost of borrowing). Understanding these elements can help you make better financial decisions.
What is Loan Amortization?
Amortization is a structured way of paying down a loan over a set time. Every payment you make covers:
- Principal: The portion that reduces your loan balance.
- Interest: The cost of borrowing, paid to the lender.
At the start, most of your payment covers interest. Over time, more goes toward principal, helping you pay off the loan.
Calculate Your Loan Payment
Use the calculator below to estimate your monthly payment.
Understanding Your Amortization Schedule
Your loan payments are structured so that you pay more interest at the beginning and more principal toward the end. Here’s an example of a 30-year, $250,000 mortgage at 5% interest:
| Month | Payment | Principal | Interest | Remaining Balance |
|---|---|---|---|---|
| 1 | $1,342.05 | $240.72 | $1,101.33 | $249,759.28 |
| 12 | $1,342.05 | $255.42 | $1,086.63 | $246,901.58 |
| 120 | $1,342.05 | $676.43 | $665.62 | $192,415.68 |
| 360 | $1,342.05 | $1,337.78 | $4.27 | $0.00 |
How to Save on Interest
- Make extra payments: Even small additional payments lower interest costs.
- Refinance: A lower interest rate can reduce monthly payments.
- Choose a shorter loan term: A 15-year mortgage costs more monthly but saves interest.
Final Thoughts
Understanding amortization helps you plan smarter. The more you know about how your loan is structured, the better financial choices you can make to save money and pay off debt faster.