Loan Calculator

Amortization is the process of paying off a debt through regular fixed payments over time. Each payment covers the interest that accrued since the last one, with whatever remains reducing the principal. Because the principal shrinks with each payment, the interest portion of each subsequent payment also shrinks — and the principal portion grows. This is why the early years of a loan feel like you're barely making a dent.

Here's a concrete example. A $25,000 car loan at 7% over 5 years has a monthly payment of $495. In month one, $146 goes to interest and $349 reduces the balance. In month 30, the split is roughly $83 interest and $412 principal. By month 60, almost the entire payment is principal. You pay the same amount every month, but the internal ratio shifts dramatically.

Total interest paid is the number most borrowers ignore until after they've signed. That same $25,000 car loan at 7% costs $4,700 in interest over five years. At 9%, the same loan costs $6,200. The monthly payment difference is about $29 — easy to dismiss — but the total cost difference is $1,500 over the life of the loan. For mortgages, this scales into tens of thousands.

Making extra principal payments is the single most effective way to reduce total interest on an amortizing loan. On a $300,000 mortgage at 6.5% over 30 years, paying an extra $200 per month reduces the loan term by roughly 5 years and saves approximately $80,000–$90,000 in total interest. The earlier you start, the more you save — because early payments eliminate future interest charges on a larger remaining balance.

Good debt versus bad debt comes down to interest rate and what you're financing. A mortgage at 6.5% on an appreciating asset is fundamentally different from a credit card balance at 24% on consumer purchases. The loan amortization table above makes the real cost of any borrowing decision visible before you commit to it.