Amortization
Gradual reduction of a loan balance through scheduled payments.
Detailed Description
Amortization
What is the main purpose of amortization in loans?
The main purpose of amortization is to gradually pay off a debt over a specified period through scheduled payments that include both principal and interest.
How does fixed amortization differ from variable amortization?
Fixed amortization has constant payment amounts throughout the loan term, while variable amortization allows payments to fluctuate based on changes in interest rates.
What is an amortization schedule?
An amortization schedule is a detailed table outlining each payment over the loan term, showing the breakdown of principal and interest, remaining balance, and total interest paid.
What impact does the amortization period have on loan payments?
Longer amortization periods typically result in lower monthly payments but higher total interest costs, while shorter periods lead to higher payments but lower overall interest.
Why is understanding amortization important for borrowers?
Understanding amortization is crucial for financial planning and budgeting, as it clarifies how payments are allocated and helps in making informed decisions about loans.