Amortization is the process of paying off a loan through regular payments that cover both interest and principal over time. Early payments lean more toward interest, and later payments lean more toward principal.
Amortization spreads a loan's repayment across scheduled payments so that each one covers the interest due for the period plus a portion of the principal. Because interest is generally charged on the remaining balance, early payments are weighted more toward interest and later payments more toward principal, even though the total payment amount stays level on a fixed-rate loan. An amortization schedule, or amortization table, lists each payment and shows how it splits between interest and principal and how the balance declines to zero by the end of the term. This structure is what makes the payments on an installment loan predictable from the start.
