In personal finance, the process of spreading a loan’s payments across scheduled principal and interest amounts is called amortization.
An amortizing loan is repaid through a series of planned payments. Each payment usually contains interest for the period and an amount applied to principal. Early payments often contain a larger interest share because interest is calculated on a higher outstanding balance. As the balance falls, more of later payments can go toward principal.
A standard amortization schedule shows the payment date, total payment, interest portion, principal portion, and remaining balance. The schedule depends on the loan amount, interest rate, payment frequency, and term. Fixed-rate mortgages and many installment loans are commonly amortizing loans.
Amortization differs from interest-only borrowing, where scheduled payments may initially cover only interest. Extra principal payments can reduce future interest and shorten the repayment period, subject to the loan’s terms.