Amortization of loans refers to the process of gradually repaying a debt, such as a mortgage or auto loan, over a set period of time. It involves making regular payments that consist of both principal and interest. The principal amount is the original amount borrowed, while the interest is the fee charged by the lender for borrowing the money. With each payment, a portion of the principal is paid off, and the remaining balance is reduced. This process continues until the entire amount borrowed has been repaid.
Amortization is an important aspect of loan management, as it provides a structured and predictable plan for repaying debt. It allows borrowers to budget effectively and avoid the risk of default. Additionally, amortization can help borrowers build equity in their property or asset over time, as each payment reduces the outstanding balance and increases their ownership stake.