Amortization

Amortization is the schedule by which a loan dies. An amortizing loan — mortgage, car loan, standard student loan — has a fixed payment calculated so that, made on time every period, it pays all accruing interest and extinguishes the entire balance exactly at the end of the term.

The mechanics create a famous pattern: each month, interest is charged on the remaining balance, and only the payment’s remainder reduces principal. Early on, the balance is large, so interest devours most of the payment — on a $300,000 mortgage at 6.5%, the first payment of $1,896 includes $1,625 of interest and just $271 of principal. Decades later the proportions flip. The table listing every payment’s split is the amortization schedule.

Two practical consequences. First, extra principal payments early in a loan are far more powerful than the same dollars later, because they remove balance that would have generated interest for years. Second, selling or refinancing early means you spent the interest-heavy years without reaching the principal-heavy ones.

Loans that don’t amortize — interest-only loans, credit cards at the minimum payment — leave the balance intact or shrinking glacially, which is exactly why they feel endless.