How Amortization Works: Paying Off Your Loan

The Principal vs. Interest Split

When you take out a mortgage or car loan, your monthly payment covers both the interest owed for that month and a portion of the principal balance.

Early in the loan term, your balance is high, so the interest charge is high. This means most of your payment goes to the bank as profit, and very little reduces your debt. As the principal decreases, interest charges drop, and more of your payment goes toward equity.

Extra Payments Power

Making even one extra payment a year applied directly to the principal can shave years off a 30-year mortgage and save thousands in interest.