amortization
The process of spreading out a loan into a series of fixed payments over time, where each payment covers both interest and a portion of the principal.
Example
“The amortization schedule showed that after 5 years, she had paid off $12,000 of the principal.”
Memory Tip
Think 'a-mort' — mort means death in French. You're slowly putting the debt to death.
Why It Matters
Understanding amortization helps you see the true cost of borrowing. In the early years of a loan, most of your payment goes toward interest rather than reducing principal. Paying even a small amount extra each month can dramatically shorten your loan term and save thousands in interest.
Common Misconception
Many people assume that since their monthly payment stays the same, they are paying equal amounts of principal and interest each month. In reality the split changes with every payment. Early payments are mostly interest while later payments are mostly principal.
In Practice
When you take out a 30-year mortgage your lender provides an amortization schedule showing every payment. In year one roughly 80% of each payment may go to interest. By year 25 that flips and most of your payment reduces the principal balance.
Etymology
From Latin 'admortire' meaning 'to kill off' — you're slowly killing off the debt.
Common Misspellings
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