Definition: The equal monthly payments of principal and interest over a specified period of time will completely payoff an amortized loan. Interest on amortized loans is paid in arrears, and more interest is paid during the early period of the loan than at the end of the loan. Borrowers can shorten the loan periods by paying more principal with each payment.
Examples:
$10,000 at 10% interest payable over five years results in an amortized payment of $212.47 per month. To figure how much interest is paid, take $10,000 x 10% = $1,000 divided by 12 = $83.33 interest. Subtract $83.33 from the amortized payment of $212.47 = $129.14 applied toward prinicpal. $10,000 less $129.14 = $9,870.06 due at the beginning of the second month. Continue this math, and by month 60, your loan will be paid in full.
