Amortization

Definition

Amortization in plain English

Amortization is the steady, chip-away process of paying off a loan a little at a time until it's gone. Each payment does two jobs at once: it covers the interest (the rent you pay for borrowing) AND shrinks the actual amount you still owe (the principal). Think of a car loan where you send the same amount every month — early on most of it goes to interest, but over time more and more goes to knocking down the balance, until one day it hits zero. It's just a schedule for erasing a debt on autopilot.

Learn these first

• Principal

Related Principles of Finance terms

• Adjusted EBITDA
• Annuity
• Annuity due
• Arithmetic mean return
• At the money (ATM)
• Binomial model
• Call option
• Compounding
• Continuous compounding
• Discounted cash flow (DCF)