Where every payment actually goes
Where every payment actually goes
An amortising loan is one where each fixed payment covers the interest accrued that month, with whatever remains going to principal. Because the interest is charged on a balance that shrinks over time, the split between interest and principal changes with every single payment — even though the payment amount never moves.
Enter your loan amount, rate, and term to see the payment, the year-by-year split, and how much of the loan is still outstanding at any point. Add an extra monthly amount to see how sharply that changes the picture.
This is the part that surprises most borrowers. Take a $300,000 mortgage at 6.5% over 30 years. The payment is about $1,896. In month one, interest is 300,000 × (0.065 ÷ 12) = $1,625. Only $271 reduces the loan.
The reason is not a trick by the lender — it follows directly from charging interest on the outstanding balance. When the balance is large, the interest charge is large, so little is left over. As principal falls, the interest charge falls with it and more of each identical payment attacks the balance.
The crossover point, where a payment finally puts more toward principal than interest, arrives surprisingly late. On this loan it is around year 18 of 30. After ten years of payments totalling roughly $228,000, the balance has fallen by only about $46,000.
The fixed payment comes from the standard amortisation formula:
Payment = P × [ r(1+r)n ] ÷ [ (1+r)n − 1 ]
The schedule is then built one month at a time. For each month: interest = balance × r; principal = payment − interest; new balance = balance − principal. Repeat until the balance reaches zero. Everything about amortisation follows from those three lines.
An extra payment goes entirely to principal, because the scheduled interest has already been covered by the regular payment. That means it does not just reduce the balance — it eliminates every future interest charge that dollar would have generated for the remaining life of the loan.
On the $300,000 example, adding $200 a month clears the mortgage roughly five years early and saves approximately $85,000 in interest. Adding $500 a month cuts around ten years and saves well over $140,000. The leverage comes from acting early, when the remaining interest stream is longest.
A word of caution: instruct your lender to apply extra amounts to principal. Left unspecified, many will hold the money toward next month's payment, which does almost nothing.
The schedule answers questions a monthly payment alone cannot. How much will I still owe if I sell in five years? Which is worth more, a slightly lower rate or a shorter term? What does refinancing at year seven actually reset?
That last one deserves attention. Refinancing into a fresh 30-year term after seven years of payments restarts the amortisation clock — you return to the front of the curve where payments are mostly interest. A lower rate can still be worth it, but comparing monthly payments alone hides the reset. Compare total remaining interest instead, or refinance into a shorter term.
Mortgages, car loans, student loans, and most personal loans amortise this way. Credit cards do not — they use revolving credit with a minimum payment recalculated from the balance, which is why they can persist almost indefinitely. Interest-only loans do not amortise during the interest-only period either, leaving the full principal due later.
Interest is charged on the outstanding balance. Early on the balance is at its largest, so the interest portion is at its largest and little is left for principal. As the balance falls, the interest charge falls and more of each identical payment goes to the loan.
Yes, particularly early in the loan. Extra amounts go entirely to principal, removing all the future interest that principal would have generated. On a 30-year mortgage, an extra $200 a month can save tens of thousands and cut several years off the term.
Refinancing into a new 30-year term does restart the schedule, returning you to the interest-heavy early payments. A lower rate can still be worthwhile, but compare total remaining interest rather than monthly payments, or refinance into a shorter term.
Amortisation describes how a fixed payment is split between interest and principal over a schedule. Simple interest describes how the interest itself is calculated. An amortising loan can use simple interest accrual.