Loan amortization is the process of paying off debt through regular, scheduled payments over time. Each payment covers both interest and principal, with the proportion shifting over the loan term. Early payments are mostly interest, while later payments are mostly principal.

The monthly payment formula is: M = P[r(1+r)^n]/[(1+r)^n-1], where M is the monthly payment, P is the principal, r is the monthly interest rate (annual rate divided by 12), and n is the total number of payments. For a $200,000 loan at 6% for 30 years: r = 0.06/12 = 0.005, n = 360, giving a monthly payment of $1,199.

An amortization schedule shows exactly how each payment is allocated. On that $200,000 loan, your first payment of $1,199 includes $1,000 in interest and only $199 toward principal. By payment 180 (halfway), it's roughly even. By payment 360, almost the entire payment goes to principal. Understanding this helps you see why extra payments early in the loan have such a big impact.

Loans come with different interest structures that affect total cost. Fixed-rate loans keep the same interest rate for the entire term, providing predictable payments. Adjustable-rate mortgages (ARMs) start with a lower rate that can change periodically, adding uncertainty but potentially lower initial costs.

Loan terms significantly impact both monthly payments and total interest paid. A 30-year mortgage has lower monthly payments than a 15-year loan, but you pay far more in total interest. On a $200,000 loan at 6%, a 30-year term costs $231,677 in interest, while a 15-year term costs only $103,788 — saving $127,889.

Simple interest loans calculate interest only on the principal balance. Compound interest loans (less common for amortized loans) calculate interest on accumulated interest. Precomputed interest loans calculate all interest upfront and add it to the principal, which means paying off early doesn't reduce total interest owed.

Extra payments can dramatically reduce your loan term and total interest paid. Even small additional amounts make a difference due to how amortization works. Paying just $100 extra per month on a $200,000 mortgage at 6% saves over $40,000 in interest and pays off the loan 5 years early.

Biweekly payments are another effective strategy. Instead of 12 monthly payments, you make 26 half-payments (equivalent to 13 full payments per year). This extra payment per year accelerates payoff without a significant budget impact.

Before making extra payments, check for prepayment penalties, which some loans charge for early payoff. Also consider whether extra payments should go to your highest-rate debt first. Use this calculator to model different payoff scenarios and see exactly how extra payments affect your loan timeline and total costs.