When you take out a loan, your monthly payments consist of two components: the loan principal and the interest. A Loan Principal vs. Interest Chart, often referred to as an amortization schedule, displays how each payment is allocated to these two parts throughout the life of the loan.
Loan Principal refers to the original borrowed amount that you must repay. For example, if you borrow $20,000 for a car, that $20,000 is your principal. Every payment reduces this balance until it reaches zero.
Interest is the fee your lender charges for borrowing money, calculated as a percentage of the remaining principal. Early in the loan term, because your principal balance is highest, you pay more interest. As the principal decreases, so does the interest portion of your payment.
This dynamic is governed by amortization, a process that structures your loan so you make fixed payments over a set term. In the beginning, a larger share of your payment covers interest; over time, the portion going toward principal increases.
For example, imagine a $10,000 loan at 5% annual interest paid over 12 months with equal monthly payments. In the first month, a greater part of the payment goes to interest, while in the last month, nearly all goes toward principal. This gradual shift is clearly detailed in a loan amortization chart.
Using this chart helps you:
- See precisely how each payment affects your loan balance.
- Understand the cost of borrowing by tracking total interest paid.
- Motivate yourself by witnessing your principal’s steady decline.
- Plan extra payments effectively, saving interest and shortening your loan.
Common misconceptions include thinking your payments don’t reduce debt early on—actually, principal is reducing even if interest seems dominant. Also, extra payments toward principal significantly decrease total interest costs.
Factors like your interest rate and loan term influence this split. Higher rates and longer terms increase total interest paid. Strategies to minimize interest include making extra principal payments, switching to bi-weekly payments to accelerate payoff, refinancing when rates drop, and choosing shorter loan terms.
For more details on principal, see our Loan Principal article. To understand how loans amortize over time, check Loan Amortization. If you want to explore making extra payments, see Principal Reduction.
For authoritative information, you can also visit the Consumer Financial Protection Bureau’s guide on loan servicing.