Amortization is the gradual repayment of a debt through scheduled installments that include both principal and interest. Most mortgages and auto loans are fully amortizing — the balance reaches zero at the end of the term.
How Amortization Works
Early payments are mostly interest; later payments are mostly principal. This happens because interest is calculated on the remaining balance, which decreases with each payment.
Amortization Schedule
An amortization schedule is a table showing every payment, the interest/principal split, and remaining balance. It helps you see exactly where your money goes each month.
Negative Amortization
Most loans fully amortize, but some adjustable-rate or interest-only loans allow payments smaller than the interest due — the shortfall gets added to the principal balance instead of reducing it. This is called negative amortization, and it means your loan balance can grow even while you're making payments. It's uncommon today but was a factor in the 2008 mortgage crisis.
Extra Payments Skip the Interest-Heavy Front-Loading
Because early payments are mostly interest, any extra amount you pay early in the loan term goes almost entirely to principal — which then reduces the interest charged on every future payment. Paying an extra $100/month on a 30-year mortgage in year one can cut years off the loan and save thousands, far more than the same $100 paid in year 25.