What is ‘Amortization’?

Question

Accepted Answer

Amortization is the process of gradually reducing or paying off a debt over a fixed period of time through regular payments.

Amortization is commonly used in the context of loans, mortgages, and other financial obligations.
It involves dividing the total debt into equal installments and paying them off over a specific period.
Each payment consists of both principal and interest, with the interest portion decreasing over time.
Amortization schedules outline the payment amounts, interest paid, and remaining balance for each period.
Example: A $10,000 loan with a 5% interest rate and a 5-year term would require monthly payments of $188.71.
By the end of the term, the entire debt would be paid off.

Accepted Answer

The repayment of the loan by instalment to cover principal amount with interest is known as amortization

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