In an amortized loan, what happens to the interest portion of monthly payments over time?

In an amortized loan, the interest portion of monthly payments decreases over time. This occurs because each monthly payment consists of two components: interest and principal repayment. At the beginning of the loan term, the outstanding principal amount is higher, which means the interest calculated on that principal is also higher. As the borrower makes payments, a portion of each payment goes toward reducing the principal balance.

As the principal decreases, the interest charged on the remaining balance also decreases, leading to a reduction in the interest portion of each subsequent monthly payment. Conversely, the portion of the payment that goes toward the principal increases over time. Therefore, the correct understanding of an amortized loan is that as borrowers progress through the repayment period, they gradually pay less interest and more principal, altering the composition of each payment. This change represents a common feature of amortization schedules, reflecting the gradual payoff of the debt while minimizing interest costs over the loan's duration.