Loans and Amortization
Every loan payment splits between interest and principal, and that split moves every month. Step through an amortization schedule below and see why an early extra payment is worth so much more than a late one.
Every fixed loan payment looks identical on the statement, month after month. Underneath, the split between what pays down what you borrowed and what pays the lender for lending it to you is quietly moving the entire time — and it starts far more lopsided than most borrowers expect.
Every payment splits between interest and principal
Amortization is the schedule that splits a fixed loan payment into two pieces every month: interest, which is the lender's fee on whatever balance is still outstanding, and principal, which actually reduces what you owe. The payment amount never changes — only the ratio between the two pieces does.
Take a $20,000 loan at 6% APR over 60 months — the exact loan the schedule below runs. The fixed monthly payment works out to $386.66. In month one, interest is calculated on the full $20,000 balance: $20,000 × (6% ÷ 12) = $100. The remaining $286.66 of that payment is what actually reduces the balance. Nothing about the $386.66 payment changed — only how it's divided.
Early payments are mostly interest
Interest is calculated on the remaining balance, and early in a loan the remaining balance is close to the full amount borrowed — so early payments are mostly interest, with only a small sliver going toward principal. Step through the schedule below month by month and watch that ratio flip as the balance shrinks.
Interest
$100
Principal
$287
Balance left
$19,713
A one-time $1,000 extra payment
Applied in month 1, it saves $334 in interest over the life of the loan. Applied in month 55, near the end, it saves only $21. The same dollar amount, the same loan — the only difference is how many months of interest it had left to prevent.
The interest share falls every month, not evenly
Interest's share of that $386.66 payment doesn't creep down in a straight line — it falls fast at first and barely at all near the end, because it tracks a shrinking balance multiplied by a fixed rate.
- 1
Month 1 — interest is 25.9% of the payment
$100 interest, $286.66 principal, on a $19,713.34 remaining balance.
- 2
Month 12 — interest is 21.7% of the payment
$83.83 interest, $302.82 principal, on a $16,463.94 remaining balance.
- 3
Month 24 — interest is 16.9% of the payment
$65.16 interest, $321.50 principal, on a $12,709.78 remaining balance.
- 4
Month 36 — interest is 11.7% of the payment
$45.33 interest, $341.33 principal, on a $8,724.07 remaining balance.
- 5
Month 48 — interest is 6.3% of the payment
$24.27 interest, $362.38 principal, on a $4,492.53 remaining balance.
- 6
Month 60 — interest is 0.5% of the payment
$1.92 interest, $384.73 principal — the final payment clears the loan.
Why an extra payment early saves more than one late
An extra principal payment works by shrinking the balance interest gets calculated on, for every remaining month of the loan. Made early, it prevents interest across nearly the whole remaining term. Made near the end, there are only a handful of months left for it to matter — the same dollar amount, doing far less work.
What one extra payment a year actually does
The effect gets far more dramatic on a longer loan. Take a $300,000 mortgage at 6% APR over 30 years — a standard $1,798.65 monthly payment. Committing to one additional full payment every year, applied directly to principal, changes the shape of the whole loan.
No extra payments
360 monthly payments — the full 30 years.
Total interest paid over the life of the loan: $347,515 — more than the amount originally borrowed.
One extra payment every year
Paid off in 297 months — 24.8 years, 5.3 years sooner, from one extra payment a year and nothing else changed.
Total interest paid: $276,591 — a saving of $70,924, on the same loan, the same rate, the same regular payment.
One extra payment a year is thirteen payments instead of twelve — an 8.3% increase in what leaves your account annually, for a saving that's a much larger share of the total interest. That asymmetry is the same mechanic as a single early extra payment, just repeated every year instead of made once.
Key takeaways
- Amortization splits a fixed loan payment into interest, calculated on the remaining balance, and principal, which actually pays down the loan.
- Because interest is calculated on the outstanding balance, early payments on any loan are mostly interest and only slightly reduce what's owed.
- That split moves fastest early and flattens out near the end — on a five-year, 6% loan, interest falls from 25.9% of the payment in month one to under 1% in the final month.
- An extra payment made early prevents interest across nearly the whole remaining term; the same amount made late has far fewer months left to save on.
- One extra payment a year on a 30-year, $300,000 mortgage at 6% APR pays it off 5.3 years sooner and saves $70,924 in interest — from an 8.3% increase in annual payments.
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