Amortization is the process of gradually paying off a loan over time through regular payments.
Each payment you make is split into two parts:
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Principal – the amount you borrowed.
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Interest – the fee the lender charges for borrowing the money.
As you make payments, more of your money goes toward the principal and less toward interest.
Example:
Let’s say you borrow $1,000 and agree to pay it back over 10 months. Each month, you pay a fixed amount. That payment slowly reduces what you owe until it reaches zero at the end of the loan term.
Common Uses of Amortization:
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Home loans (mortgages)
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Car loans
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Personal loans
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Business loans
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Also used in accounting to spread out the cost of intangible assets like patents or trademarks.
Why It Matters:
Amortization helps you:
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Know your monthly payment
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Understand how much you’ll pay in total interest
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Plan your budget more easily