Amortization

Amortization is a method of repaying a debt through regular, equal installments that include both principal and interest. In the early stages of an amortized loan, a larger portion of each payment goes toward interest, while later payments apply more toward the principal balance.

This concept is most commonly associated with mortgages and auto loans. For example, on a 30-year fixed mortgage, your monthly payment stays the same, but the split between interest and principal shifts over time. In the first year, you might pay 70% interest and 30% principal; by year 25, those numbers are reversed.

Understanding amortization helps borrowers see the true cost of a loan and the benefits of making extra payments early. Even small additional payments toward principal in the first few years can save thousands in interest over the life of the loan.