In more detail
In a fixed-rate loan every payment is equal, but each month's interest is charged on the remaining balance, so early payments are mostly interest and late ones mostly principal. The payment comes from M = P·r / (1 − (1 + r)^−n), where r is the monthly rate and n the number of payments. A table showing each payment's split and the balance after it is an amortization schedule. See How Loan Amortization Works.
Why it matters
Because interest is front-loaded, the balance falls slowly at first: selling or refinancing after a few years leaves more debt than many people expect. Extra payments early in the term save the most interest.
Example
A $200,000 loan at 6% over 30 years:
| Item | Amount |
|---|---|
| Monthly payment | $1,199.10 |
| Payment 1: interest / principal | $1,000.00 / $199.10 |
| Year 1: interest / principal | $11,933.19 / $2,456.02 |
| Balance after 15 years | $142,097.69 |
| Total interest over 30 years | $231,676.38 |
Common confusion
In accounting, amortization also means spreading the cost of an intangible asset, such as a patent, over its useful life; for physical assets the same idea is called depreciation.