What does amortization in a loan context refer to?

Amortization in the context of a loan specifically refers to the process of paying off a loan through regular payments that consist of both principal and interest. This structured payment schedule allows the borrower to gradually reduce the outstanding balance on the loan over time. Typically, the initial payments consist of a higher portion of interest, while later payments provide a greater share of principal repayment, resulting in a gradual decrease of the loan balance until it is completely paid off by the end of the loan term.

Understanding amortization is crucial for borrowers as it affects the overall cost of the loan and helps them plan their finances accordingly. It's important to note that the concept of amortization is distinct from other aspects of loans, such as the initial cost of the property or the timeline for loan approval, which do not encompass the repayment structure of the loan itself.