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Amortization
Definition
Amortization is the process of spreading out a loan into a series of fixed payments over time, where each payment covers both principal and interest.
Explanation
Amortization determines how your monthly payments are structured over the life of a loan. With each payment, a portion goes toward interest and the remainder reduces the principal balance. In the early years, more goes toward interest; over time, more goes toward principal.
Most mortgage, auto, and personal loans use amortization schedules that show every payment, interest and principal portions, and remaining balance after each payment.
Example
A $300,000 30-year mortgage at 6% interest has a monthly payment of about $1,799. In the first month, $1,500 goes to interest and only $299 to principal.