How Amortization Actually Works
Amortization is the process of paying off a loan through fixed periodic payments that each cover that period's interest first, with whatever remains going toward principal — because interest is calculated on the shrinking balance, the interest portion of each payment decreases over time while the principal portion increases, even though the total payment stays the same.
This front-loaded interest structure is standard across mortgages, auto loans, and personal loans, and understanding it explains a lot about how loan balances actually shrink.
Why the split isn't constant
Early in the loan, the balance is at its highest, so the interest charge for that period is also at its highest — since the total payment is fixed, whatever's left after covering that larger interest charge (a smaller amount) goes to principal. As the balance shrinks, the interest charge shrinks with it, leaving more of each fixed payment for principal.
Why this matters for early payoff
Because so little of an early payment goes to principal, paying off a loan early in its term saves more interest per dollar of extra payment than paying the same extra amount later in the term, when the balance — and thus future interest charges — is already much lower.