How amortization actually works

Every fixed-rate loan payment is the same amount from your first payment to your last — but what that payment is actually made of changes every month. Each payment covers two things: interest on whatever balance you still owe, and principal, which reduces that balance. Early on, your balance is highest, so more of each payment goes to interest. As the balance shrinks, less interest is owed, so more of the same payment goes to principal. This is called amortization, and it's why paying a little extra early in a loan saves more total interest than the same extra payment made later.

A worked example

Take the calculator's own default numbers: a $20,000 loan at 6.5% APR over 5 years. That works out to a monthly payment of $391.32, and $3,479.38 in total interest over the life of the loan — $23,479.38 paid back in total on a $20,000 loan. Here's what changes payment to payment, even though the payment amount itself never does:

The first payment is 28% interest; the last is 99% principal. That's the mechanism behind advice like "extra payments early save the most" — an extra $100 toward payment 1 skips $100 of principal that would otherwise generate interest for the next 59 months. The same $100 toward payment 55 only skips a few months of that.

Why the loan term you choose matters so much

Stretching the same $20,000 loan from 5 years to 7 years drops the monthly payment from $391.32 to $296.99 — genuinely helpful if that's what makes the budget work. But total interest rises from $3,479.38 to $4,947.05, because the balance sits accruing interest for two more years:

Neither end is "correct" — a shorter term costs less overall but demands a higher monthly payment; a longer term is easier month to month but costs more in total. The calculator above updates instantly, so it's worth testing your own loan amount and rate at a couple of different terms before deciding.