There are essentially two different ways to pay off a loan and it is straight-up repayment and annuity. If you want to read more about straight amortization, you can follow the previous link because here we will look a little closer to annuity.
How does an annuity loan work?
When you borrow money, you must pay both interest and repay the loan at each repayment period. This is no wonder in any way as this applies to all loans the question is more precisely how much you pay and what goes into interest and what is used for repayment.
Calculated on the amount you have borrowed
When it comes to an annuity loan, you pay exactly the same amount each month to the lender. This means that in the beginning you will pay a lot in interest at every opportunity and less in amortization. Then for each month as the loan gets smaller and smaller you will instead repay more and more. Interest is always calculated on the amount you have borrowed and when you repay the loan it will be a small amount to pay interest on.
Then to get it all done so that you pay the same amount every month, you instead increase the amortization by the same amount as the interest cost falls.
A major advantage of a loan of this kind is that you always know exactly what you will be paying each month for the entire loan period. This makes it easy to plan the economy when you know in advance what will happen.
We illustrate an annuity loan
Below you can find a simple illustration of how an annuity loan works. The upper line symbolizes how much you pay in total and then you see the two different departments interest and amortization how they increase and decrease over time, in the end, in principle, just being amortization.