Debt & Credit

Amortization

The process of paying off a loan through regular payments that cover both principal and interest.

Also known as: loan amortization, amortizing

What You Need to Know

Amortization is how loan payments are structured over time. Each payment includes both principal (the loan amount) and interest (the cost of borrowing).

How Amortization Works:

Early payments: Mostly interest, little principal
Later payments: Mostly principal, little interest
Total cost: Principal + all interest paid over loan term

Amortization Schedule Example:

Month 1: $500 payment = $400 interest + $100 principal
Month 12: $500 payment = $350 interest + $150 principal
Month 24: $500 payment = $300 interest + $200 principal

Key Benefits:

Predictable payments: Same amount each month
Automatic principal reduction: Loan balance decreases over time
Interest calculation: Based on remaining balance

Amortization Factors:

Loan amount: Higher principal = higher payments
Interest rate: Higher rate = more interest paid
Loan term: Longer term = lower payments but more total interest

Extra Payments Impact:

Paying extra principal reduces total interest
Shortens loan term
Saves money over time

Sources & References

This information is sourced from authoritative government and academic institutions:

consumerfinance.gov
https://www.consumerfinance.gov/ask-cfpb/what-is-amortization-en-100/

Put your knowledge into action with these interactive tools:

Loan Amortization Calculator

Generate detailed amortization schedule with extra payment scenarios

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Mortgage Calculator

Calculate monthly mortgage payment, total interest, and complete cost of homeownership with amortization

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APR (Annual Percentage Rate)

The total yearly cost of borrowing money, including interest and fees, expressed as a percentage.

Annual Fee

Yearly charge for having a credit card—$0 to $550+. Premium cards charge fees but offer rewards that can exceed cost for high spenders.

BNPL (Buy Now, Pay Later)

A short-term financing option that lets you split purchases into installment payments (usually 4 payments over 6 weeks) with little or no interest—if you pay on time.