Interest is charged on what you still owe
Each month the lender multiplies your remaining balance by the monthly rate. That is the interest. The rest of your payment goes to principal, which lowers the balance. Because the balance is highest at the start, the interest share is highest at the start too.
The monthly rate is the yearly rate divided by 12. A 6% loan has a monthly rate of 0.5%.
Worked example: a $20,000 loan, 6%, five years
The payment is $386.66 a month, which adds up to $23,199.36 over 60 months. The interest is $3,199.36.
In year one you pay $1,103.81 in interest and $3,536.06 in principal, leaving a balance of $16,463.94. By year three the interest is $654.16 and the principal $3,985.71. In year five the interest is just $147.34 and the principal is $4,492.53. Same payment every month, very different split.
What this means for extra payments
An extra dollar paid toward principal early removes the interest that dollar would have generated for the rest of the loan. The same extra dollar paid in the last year saves far less. If you plan to pay extra, do it sooner.
Check two things with your lender first: that extra money is applied to principal rather than held toward the next payment, and that there is no penalty for paying early.
Mistakes to avoid
Assuming a payment lowers the balance by the full amount. Early on, a large part goes to interest. Trading in a car in the first year or two, when you still owe a lot, is a common way to end up owing more than it is worth. And comparing loans only by monthly payment hides differences in total interest.
Try the calculator
Run your own numbers in the free loan amortization schedule calculator. It works in your browser and nothing you enter is saved or sent.
Sources
Common questions
What is amortization?
Paying a loan off in regular installments so that the balance reaches zero at the end of the term.
Do all loans work this way?
Most fixed-rate installment loans do. Some loans calculate interest differently, so read your loan agreement.
Where do I find my loan's rate?
On your loan agreement and statements. The annual percentage rate is the figure most comparable between lenders.
This guide is general information, not financial, tax or legal advice. Rates, fees and rules change, so confirm current terms with the lender, store or agency involved. All dollar figures are invented examples.