Amortization

Amortization refers to the process of gradually paying off a debt over a set period of time through regular payments. These payments typically consist of both principal and interest, allowing the borrower to reduce the overall balance of the loan until it is fully paid off.

For example, in a mortgage agreement, a homeowner may borrow $200,000 to purchase a house and agree to repay it over 30 years with a fixed Interest Rate. Each monthly payment includes a portion that goes towards reducing the principal and another portion that covers the interest accrued on the remaining balance.

In another case, a business may take out a loan of $50,000 to purchase equipment. If the loan is structured to be amortized over five years with monthly payments, the business will pay a set amount each month until the entire loan is paid off, including interest charges.