What is amortization on a personal loan?

How amortization works: Example: $10,000 loan at 12% APR, 36-month term. Monthly payment: $332.14 (fixed). Month 1: Interest portion = $10,000 x (12%/12) = $100. Principal portion = $332.14 - $100 = $232.14. Remaining balance: $10,000 - $232.14 = $9,767.86. Month 2: Interest portion = $9,767.86 x (12%/12) = $97.68. Principal portion = $332.14 - $97.68 = $234.46. Remaining balance: $9,767.86 - $234.46 = $9,533.40. This continues until month 36, when the final payment pays off the last small balance.

Why front-loaded interest matters: In a 36-month loan, approximately 36% of all interest paid occurs in the first 12 months. If you pay off the loan in month 18, you have already paid more than half the total interest while only retiring half the principal. This is why prepaying early in the loan life saves the most money - each extra principal payment reduces the base on which future interest is calculated.

Amortization schedule: A full amortization schedule shows every payment's split between interest and principal over the loan term. Most lenders provide this on request. You can also generate one using the PMT function in Excel or Google Sheets, or any online amortization calculator. Understanding your amortization schedule helps you: Know how much you owe at any point. Understand how much extra payments actually save. Calculate the breakeven point for refinancing.

Simple interest vs. compound interest: Most personal loans use simple interest (calculated on the outstanding principal balance). Unlike compound interest (where interest accrues on previously unpaid interest), simple interest means extra principal payments immediately reduce the base for future interest calculations. This is buyer-friendly.