Amortization

Amortization refers to the process of gradually reducing or paying off a debt, such as a loan or a mortgage, over a specific period of time through regular payments. These payments typically consist of both the principal amount borrowed and the interest that accrues on the outstanding balance.

Amortization schedules outline the payment plan, detailing how much of each instalment goes towards reducing the principal balance and how much covers the interest. In the initial stages of a loan, a larger portion of the payment goes towards interest, while over time, the proportion allocated to the principal increases. This systematic approach ensures that the debt is fully repaid by the end of the agreed-upon term.

Amortization is commonly used in various financial contexts, including home mortgages, car loans, and other types of instalment loans. It helps borrowers manage their repayment obligations and allows lenders to receive a consistent stream of payments over the life of the loan.