Amortization is a financial mechanism used to gradually reduce or pay off a debt through regular payments over a predetermined period. In the context of loans, such as mortgages, each installment comprises both principal and interest.
Early payments primarily cover interest, but over time, a larger portion contributes to reducing the loan balance. This systematic approach ensures the complete repayment of the loan by the end of the term.
Amortization schedules outline the payment breakdown, aiding borrowers in understanding the evolving allocation between interest and principal, facilitating budgeting and providing clarity on the loan’s progression toward full repayment.
