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Loan Amortization Schedule Explained (Why Interest is Front-Loaded)

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Understand loan amortization, monthly payments, and why early payments are mostly interest. Includes an example and a loan calculator.

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Loan Amortization Schedule Explained (Why Interest is Front-Loaded)

A loan amortization schedule is a month-by-month breakdown of:

  • your payment
  • how much goes to interest
  • how much goes to principal
  • your remaining balance

Why interest is “front-loaded”

Interest is calculated on your remaining balance.

Early in the loan:

  • your balance is high → interest portion is high

Later in the loan:

  • your balance is lower → interest portion shrinks and principal paydown accelerates

The monthly payment idea (fixed-rate loans)

Most loans use a standard fixed payment calculation. You don’t need to memorize the formula.

Conceptually:

  • each payment covers the month’s interest
  • whatever is left goes to principal
  • the fixed payment is set so the balance reaches $0 at the end of the term

Example: amortization intuition

Assume:

  • Loan balance: $10,000
  • APR: 12%
  • Monthly rate: 1% (12% ÷ 12)

Month 1 interest:

  • 10,000 × 1% = $100

If your monthly payment is $250:

  • Interest = $100
  • Principal = 250 − 100 = $150
  • New balance ≈ 10,000 − 150 = $9,850

Month 2 interest:

  • 9,850 × 1% = $98.50

Same payment, slightly less interest, slightly more principal — and so on.

The “extra payments” superpower

Extra principal payments do two things:

  1. Reduce your balance faster
  2. Reduce future interest (because interest is computed on a smaller balance)

Even small extra payments can cut:

  • total interest paid
  • total payoff time

Common mistakes

  1. Confusing APR with the monthly rate
  2. Assuming equal principal each month (most loans don’t work that way)
  3. Not confirming extra payments go to principal
  4. Ignoring fees (origination fees can change the real cost)

Calculate your payments and payoff faster

Use the DailyROI Loan Calculator:
Loan Calculator

FAQ

Is amortization the same for mortgages and auto loans?

Yes — the same concept, but mortgages are usually longer, so front-loaded interest is more noticeable.

Why does my balance drop so slowly at first?

Because early payments mostly cover interest on a high balance.

Should I refinance?

It depends on the rate difference, fees, and how long you plan to keep the loan.

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