In a fully amortized loan, as each payment is made, what happens to the interest and principal portions?

In a fully amortized loan, each payment consists of both interest and principal. Initially, the loan balance is at its highest, which means that the interest charged on the remaining principal balance is also at its highest. As payments are made, the principal amount that remains unpaid decreases. This reduction in the outstanding principal means that, over time, the interest amount calculated on the remaining balance also decreases.

Consequently, as the interest portion of the payment diminishes, the amount being applied to the principal increases. This process is a characteristic of amortization, where the payment structure is designed so that the loan is paid off at the end of the term, with each payment gradually shifting the balance from a higher interest component to a higher principal component. This aligns with amortization schedules typically used in mortgage loans, illustrating the gradual shift from interest to principal over the life of the loan.