Paying a debt through regular installments over time.
Amortization is a term that is closely associated with mortgages and car loans, although any large debt can be amortized over a specified time. An amortization schedule lays out the amount to be paid for each installment, including interest, and shows the balance remaining after each payment.
Lenders charge interest on mortgages and other loans. Simple interest, calculated on the principal (the amount originally borrowed) is usually only charged on loans with a term of 60 days or less. For long-term loans amortized over a period of years, interest is compounded, that is, calculated on the principal plus any interest accrued during past periods. With compound interest, the more payments you can make, the less money you will ultimately pay.
When debt is amortized, there is usually a set term that includes a specific interest rate. For example, a 5-year mortgage might come with a 6.5% interest rate. You can often select a fixed or variable interest rate. With a fixed rate, you will pay the stated rate throughout the term. Variable interest rates are typically pegged to the lender’s prime rate. With variable interest, the rate you pay will change with each change in the prime rate.