The purpose of the amortization is beneficial for both parties: the lender and the loan recipient. In the beginning, you owe more interest because your loan balance is still high. So, most of your standard monthly payment goes to pay the interest, and only a small amount goes to towards the principal.

Why do you amortize a loan?

More of each payment goes toward principal and less toward interest until the loan is paid off. Loan amortization determines the minimum monthly payment, but an amortized loan does not preclude the borrower from making additional payments. ... This helps the borrower save on total interest over the life of the loan.

How do banks amortize loans?

An amortized loan is a type of loan that requires the borrower to make scheduled, periodic payments that are applied to both the principal and interest. An amortized loan payment first pays off the interest expense for the period; any remaining amount is put towards reducing the principal amount.