How Loan Interest Actually Works (With a Real Amortisation Example)
Why your monthly payment stays flat while the interest math changes every month — and how extra payments really help.
Marcus Webb
Tools & Productivity Writer
Most loans in the world are amortised: you pay a fixed amount every month, and each payment splits into interest and principal. The split is the whole story — early payments are mostly interest; late payments are mostly principal.
The fixed-payment magic
A 300,000 loan at 5% for 30 years has a monthly payment of 1,610.46 — set once and fixed for three decades. The formula balances the math so every payment is identical while the interest/principal split shifts smoothly over time.
What happens in month 1 vs month 360
| Payment | Interest portion | Principal portion | Balance after |
|---|---|---|---|
| Month 1 | 1,250.00 | 360.46 | 299,639.54 |
| Month 120 | 980.21 | 630.25 | 234,615.08 |
| Month 240 | 515.22 | 1,095.24 | 122,579.98 |
| Month 360 | 6.70 | 1,603.76 | 0 |
In month one you pay 1,250 of interest on the full balance. By month 240, interest is down to 515 because the balance is much smaller. The payment never changes — only the split.
Why extra payments are so powerful
An extra 200 per month on that same loan does something striking: it pays off the loan roughly 12 years early and saves about 100,000 in interest. The reason is that extra payments go straight to principal — they reduce the balance that future interest is charged on.
This is why financial advisors emphasise extra payments on high-rate loans: the effective return on an extra payment equals the loan's interest rate, tax-free and guaranteed — hard to beat anywhere else.
Run the Loan Calculator with an extra payment and watch the payoff month move up. The amortisation table shows the effect month by month.
Why is most of my early payment interest?
Interest is charged on the remaining balance, which is largest at the start. As the balance shrinks, more of the fixed payment frees up for principal.
Does paying extra always help?
If the loan has no prepayment penalty and your rate is higher than your savings yield, yes. Check the penalty terms first — some loans charge for early payoff.
Written by Marcus Webb
Marcus covers productivity, automation and everyday internet tools. He believes great tooling should feel invisible.
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