Finance · Glossary
What is Amortization?
Quick definition
Spreading loan payments over time so each payment covers both principal and interest, with the loan fully paid off at the end.
Full explanation
Amortization is the process of paying off a debt with regular payments over a set period. Each amortized payment includes both principal and interest, with the ratio shifting over time. Early payments are mostly interest; later payments are mostly principal. A standard 30-year mortgage is fully amortized — by month 360, the balance is zero. An amortization schedule is the table that shows this breakdown for every payment. Auto loans and student loans are typically amortized. In contrast, credit cards are NOT amortized — they require minimum payments but can run indefinitely. The amortization formula is M = P × [r(1+r)ⁿ] / [(1+r)ⁿ − 1].
Related calculators
Calculators that use or explain Amortization.
Related terms
More from Finance
APR (Annual Percentage Rate)
The yearly cost of a loan, expressed as a percentage, including most fees. Used when borrowing money.
APY (Annual Percentage Yield)
The yearly return on a deposit or investment, including the effect of compounding. Used when saving money.
Compound Interest
Interest calculated on the initial principal AND on the accumulated interest from previous periods. The engine of long-term wealth.
Simple Interest
Interest calculated only on the original principal, not on accumulated interest. Used in short-term and consumer loans.
Principal
The original sum of money borrowed or invested, not including interest. The base on which interest is calculated.
Equity
The current market value of an asset minus any outstanding debt against it. What you actually OWN of the asset.
Last reviewed: June 15, 2026 • Category: Finance