At its most basic, amortization is paying off a loan over a fixed period of time (the loan term) by making fixed payments that are applied toward both loan principal (the original amount borrowed) and interest (the charge for taking out the loan, a percentage of the principal).įor example, if you are paying a mortgage, car loan, or student loan with a fixed interest rate, your monthly payment will remain the same over the lifetime of your loan, but the amount of each payment that goes toward principal and interest will change.
