What happens to interest in equal monthly payments on an amortized loan?

In an amortized loan, equal monthly payments consist of two components: principal and interest. As payments are made over time, the portion of each payment attributed to interest decreases while the portion applied to the principal increases. This is due to the way interest is calculated on the remaining balance of the loan.

Initially, the outstanding loan balance is at its highest, resulting in a larger interest amount being calculated for the first few payments. As the borrower continues to make payments, the principal amount of the loan decreases. Consequently, the interest calculated on this decreasing principal also declines, leading to smaller interest amounts over time. This mechanism is fundamental to amortized loans, so the payments effectively lead to a diminishing interest component as the loan matures.

Understanding this amortization process is crucial for borrowers, as it highlights how their payments will impact their loan balance over time, influencing decisions regarding refinancing, additional payments, or loan payoff strategies.