The Structure of Amortized Loan Payments
Amortized loan payments are usually equal monthly payments over a fixed term. But within that fixed payment, the ratio of interest to principal changes.
Here’s an example:
| Month | Total Payment | Interest | Principal | Balance Left |
|---|---|---|---|---|
| 1 | $500 | $400 | $100 | $9,900 |
| 2 | $500 | $396 | $104 | $9,796 |
| 3 | $500 | $392 | $108 | $9,688 |
As you can see, interest gets smaller while principal increases. This system makes it easier to budget with fixed payments, while still steadily paying off your debt.
Real-Life Example of Amortization
Let’s say you take out a $10,000 car loan with 6% interest for 5 years. If you follow the amortized payment plan, you’ll pay around $193.33 every month. The first payment will be mostly interest (around $50), and the rest will go toward reducing the loan.
As months go by, the interest portion decreases, and your actual loan reduces faster. By the end of 5 years, you’ll have fully paid off the loan. This predictable plan makes amortization very practical for real-life loans like cars, homes, and education.
