Amortization refers to the process of paying off a loan over time through regular payments of principal and interest. In an amortized loan, each payment made by the borrower goes towards both paying off the principal (the original amount borrowed) and paying interest on the remaining balance.
When a loan is amortized, the borrower makes a series of equal payments over the loan term, and each payment is divided between paying off the principal and paying interest. As the loan progresses, a larger portion of each payment is applied towards paying off the principal, while a smaller portion is applied towards interest.
This way, the outstanding balance of the loan gradually decreases over time, until the loan is fully paid off at the end of the loan term. The amortization schedule shows the breakdown of each payment and the remaining balance of the loan at the end of each period.
Amortization is most commonly used for long-term loans such as mortgages, auto loans, and student loans. It allows borrowers to pay off their loans over time, and it helps them to plan and budget for the future. Additionally, amortization also allows borrowers to pay off the loan with a predictable payment schedule, which is helpful for budgeting and financial planning.