amortize
To gradually pay off a debt through regular payments that cover both principal and interest.
Example
“They chose to amortize the business loan over 10 years to keep monthly payments manageable.”
Memory Tip
Amor-TIZE — tize sounds like 'ties.' Regular payments tie up the loan until it's gone.
Why It Matters
Understanding amortization helps you see exactly how much interest you will pay over the life of a loan and how your monthly payments are split between principal and interest. This knowledge allows you to make informed decisions about loan terms, extra payments, and whether refinancing makes financial sense for your situation.
Common Misconception
Many people assume that their early loan payments go mostly toward paying down the principal, but the opposite is true. In the early months of an amortized loan, the majority of each payment goes toward interest, with only a small portion reducing the actual amount owed.
In Practice
Consider a 30-year mortgage for 300,000 dollars at 6 percent annual interest. Your monthly payment is approximately 1,799 dollars, but in the first payment, about 1,500 dollars goes toward interest and only 299 dollars reduces your principal balance. By year 20, this ratio reverses significantly, with most of the payment finally going toward principal.
Etymology
From Latin 'admortire' — to kill off, extinguish a debt.
Common Misspellings
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