Glossary term
Amortization
Amortization is the process of paying off a loan with equal, regular payments that each cover the interest due for the period plus a slice of principal. Early payments are mostly interest; later ones are mostly principal. By the final payment the balance reaches exactly zero, which is how most car, personal and student loans work.
Updated October 17, 2026 · Editorial Team
How Amortization works in practice
An amortizing loan sets a fixed payment using the loan amount, the periodic rate and the number of payments. Each month the lender charges interest on the remaining balance, takes that from your payment first, and applies the rest to principal. Because the balance falls, the interest share falls too, and more of each payment goes toward principal.
Borrow $25,000 at 6.00% for 60 months. The payment is $483.32. In month one, interest is $25,000 × 0.005 = $125.00, so $358.32 reduces the balance. By the last payment, interest is only about $2.40. Total interest over the loan is $3,999.20.
Understanding amortization shows why extra payments early in a loan save the most interest, and why the balance seems to fall slowly at first. It also explains why refinancing late in a loan saves less than you might expect: most of the interest has already been paid.
Amortization: quick questions
Why is so much of my early payment interest?
Interest is charged on the remaining balance, which is highest at the start. As the balance drops, the interest portion shrinks and principal grows.
Do extra payments change amortization?
Yes. Extra money applied to principal lowers the balance, which cuts future interest and can end the loan early.
Are credit cards amortizing?
No. Cards are revolving credit with a minimum payment that changes with the balance, so there is no fixed payoff date unless you set one.
Sources
- Regulation Z (Truth in Lending), 12 CFR Part 1026 — Consumer Financial Protection Bureau. Accessed October 17, 2026.
- Auto loans — Consumer Financial Protection Bureau. Accessed October 17, 2026.
We cite primary sources: regulators, central-bank data and federal agencies. Worked examples on this page are our own calculations. See our methodology.
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