In an amortized loan, where does the initial payment go?

In an amortized loan, the initial payment is allocated primarily to interest expenses first, followed by a portion applied toward the principal balance of the loan. This structure is a fundamental characteristic of amortization, wherein the borrower pays off the debt over time through regular payments that consist of both interest and principal.

At the beginning of the loan's life, interest costs are relatively high because they are calculated on the entire outstanding balance. As payments continue, the amount applied toward interest gradually decreases, and more of each payment begins to apply to the principal. This ensures that the loan is eventually paid off by the end of its term, even though the earlier payments are predominantly directed toward interest.

This method of payment is standard in loan agreements and vital for understanding loan amortization schedules, emphasizing how payment contributions will change over time.