Loan amortization interest?

Question

I understand loan amortization for the most part. I understand you are figuring out a schedule of equal payments over a period time, and how often the interest is compounded, along with the given iterest and principal of the loan.

My question is, Why does the amount of interest decrease over time as the principal falls. 

I know the payments add up to the total amount of the principal plus all the interest compounded, so why isn't the interest equally split. My book doesn't say why. they just say that it happens.

Thanks

probably not something i need to know, but it's important

kricket · Accepted Answer

It is because the interest is not charged into the loan at the beginning, it is calculated upon the principal at the specified compounding time frame be it monthly or yearly or whatever.

The payment you make pays off the interest that you owe at that time and then reduces the principal amount a little bit.  The next time the interest is compunded, the principal is a little smaller, so the interest is less.  Payment number two pays the interest you owe and then reduces the principal amount a little more.  This reduction of the principal is the reason that the interest amount decreases over time.

That reduction of pricipal is what you want to happen.  If at all possible pay more than the payment (especially at the beginning of the loan) that way the principal gets reduced even faster and less interest will be charged during the life of the loan, keeping a lot(thousands during the lifetime of a mortgage) of money in your pocket instead of going to the banks.


Hope this helps

Jose B. · Answer

There are several online calculators that would help you see this mote easily. I have one on my website and I have included a link for another.
http://www.josebarrios.com/mortgage-amor... 
and 
http://www.amortization-table.net/

Hope this helps.

Trending News

Loan amortization interest?

2 Answers