How does loan amortization work?

Amortization is the process of how the principal of the loan is paid down over time through regular, fixed payments. Lenders will illustrate how this works in an “amortization schedule.”

The schedule shows how the amortization process works over the entire life the loan, breaking out each monthly payment in detail. For each month, an amortization schedule will show how much principal you paid down, how much in interest you paid, and how much is left on your loan balance.

While the amount you pay to the bank each month doesn't change over time, the amount of interest vs. principal you pay does. Over the repayment period, the “amortized” amount of interest decreases while the amount of principal you pay off increases. In other words, your early repayments are mostly interest with a small amount of principal. As you pay off your loan, this ratio gradually reverses.

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