Amortization refers to the repayment of the principal of a loan on a regular and periodic basis, often monthly or weekly. This repayment of borrowed money is made in the same manner as the payment of interest.
If a loan is not amortized, the borrower will pay interest until the maturity date of the loan. At maturity, the capital must be repaid.
Car loans and mortgages
Most loans to individuals are amortized over several months or years, which is the case with mortgages and car loans. For example:
Amortization can be calculated using a variety of different formulas. Thus, the portion of the total periodic payment allocated to repaying capital may be smaller at the beginning of the amortization period, as is the case with a mortgage. For this type of loan, the portion dedicated to interest upfront is typically higher than that used to repay the capital.
How to calculate amortization
To calculate amortization on a mortgage, use this mortgage payment calculator.
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