In an amortized loan, how are payments applied over time?

In an amortized loan, the standard practice is that payments are applied first to the interest accrued on the loan, and then any remaining amount is applied to the principal balance. This approach is rooted in the structure of amortization, where the total monthly payment remains consistent throughout the loan term.

Initially, during the early stages of the loan, a larger portion of the payment goes toward covering interest costs because the principal balance is at its highest. As time progresses and the principal is gradually paid down, the interest portion of each payment decreases, and a larger portion is applied to the principal.

This method ensures that the lender is compensated for the loan amount as the borrower pays down the principal through regular payments. The total of all payments adds up to fully amortize the loan over its term, bringing the balance to zero by the end of the term. This structure is essential for accurately understanding how debt is paid off over time.