Amortisation
The schedule by which a loan is repaid, splitting each payment between interest and principal.
Every payment on a normal loan does two jobs: it covers the interest accrued, and whatever is left reduces the principal.
Early on, most of the payment is interest, because the balance it is charged on is large. Later, the same payment is mostly principal. This is why a loan feels stuck for a long time and then finishes surprisingly quickly.
Two practical consequences. Overpayments go entirely against principal, so they reduce every future interest charge and are worth more than their size suggests. And extending a term lowers the payment while raising total interest — which is how a longer loan can feel cheaper and cost more.
Words on this page
- Interest — The price of using someone else's money — paid by borrowers, earned by lenders.
- Principal — The original amount borrowed or invested, before any interest is added.
Related terms
Covered properly in Learn.