Amortization
Paying off a loan with equal payments split between interest and principal, with the split shifting toward principal as the balance shrinks.
Reviewed May 2026.
An amortizing loan is one where you make equal monthly payments and the loan is fully paid off at the end of the term. Each payment has two parts: interest (charged on the remaining balance) and principal (the actual loan reduction).
Early in the loan, most of your payment goes to interest because the balance is high. As the balance shrinks, interest charges shrink, and more of each payment goes to principal. By the final months you're paying mostly principal.
The exact math isn't worth memorizing — that's what the calculator is for. What matters: early payments are mostly interest, late payments are mostly principal, and the split shifts gradually across the term. (For the curious, the standard formula is M = P · r(1+r)ⁿ / ((1+r)ⁿ − 1), where r is monthly rate and n is term in months.)
PayoffMath angle. Amortization is why the same $100/month extra saves you several thousand in interest in year 1 of a 30-year loan but only a small fraction of that in year 28. The lever has a half-life — early-year extras shift the payoff date much more than late-year extras.
Why it matters. Understanding amortization is what lets you read your own loan correctly: how much of next month's payment is interest, why the payoff date moves so much when you add extra principal, and why the same dollar of extra saves more early than late.
Common mistake. Thinking 'paying double next month' doubles your progress. It doesn't — the second monthly payment's interest portion still gets charged. Extras work because they reduce principal directly, not because they double the schedule.
Try the mortgage payoff calculator → — see exactly how your amortization shifts when you add extra to principal.
Worked example
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Sources and review
Reviewed May 2026. Glossary entries are plain-language definitions, not legal definitions. For account-specific rules, your loan documents control.
Definition by James L. Wu. Plain-language gloss, not a legal definition. For terms that show up in your loan paperwork, the governing language is in your loan documents. See the editorial policy for sourcing.