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Amortization is the process of paying off a debt over time through regular, equal payments. Each payment covers both principal and interest.
In Depth
Amortization refers to the process of gradually paying off a loan or debt through a series of fixed payments over a set period. Early payments mostly cover interest, while later payments go more towards reducing the principal balance. This systematic reduction of debt is common for mortgages, car loans, and other installment loans, ensuring the debt is fully paid by the end of the loan term.
Example
An amortization schedule shows how much of each mortgage payment goes towards principal and interest over the life of the loan.