What does a loan's amortization schedule illustrate?

A loan's amortization schedule is a detailed breakdown that illustrates how each payment is applied to the principal and interest over time. It predominantly shows that as the loan progresses, the amount paid towards the principal gradually increases each month, while the interest portion decreases. This is a direct result of how amortization works: in the early stages of the loan, a larger portion of each payment goes toward interest because the outstanding principal is still high. As the principal is paid down, the interest charged on the remaining balance decreases, allowing more of each payment to be allocated to reducing the principal.

This phenomenon is crucial for borrowers to understand, as it impacts the total cost of borrowing and the equity built in the property over time. Understanding the amortization process can help borrowers plan their finances and evaluate how additional payments could reduce the overall interest paid and shorten the loan term.