Understanding Loan Amortization

When you take out a loan, each payment is split between interest and principal. An amortization schedule shows exactly how that split changes over time.

How It Works

Interest is charged on the remaining balance. So:

• Early payments: Balance is high → most of your payment goes to interest
• Later payments: Balance is low → most of your payment goes to principal

This is why a 30-year mortgage might have you paying more in interest than the house cost. The first few years barely touch the principal.

The Formula

Monthly payment is calculated as:

M = P × [r(1+r)^n] / [(1+r)^n - 1]

Where:

• P = principal (loan amount)
• r = monthly interest rate (APR ÷ 12 ÷ 100)
• n = number of months

How Extra Payments Help

Extra payments go directly to principal, skipping future interest. Benefits:

1. Shorten the loan term – Pay off years early
2. Reduce total interest – Save thousands
3. Build equity faster – Important for mortgages

Use our Loan Payment Calculator and Extra Payment Calculator to model different scenarios.