What is Amortization?
financeDefinition
Amortization is the process of spreading a loan repayment over time through regular installments (EMIs). Each payment covers both interest and a portion of the principal. An amortization schedule is a table showing exactly how much of each EMI goes to interest versus principal reduction across the entire loan tenure.
Detailed Explanation
In loan amortization, the interest portion of each EMI is calculated on the outstanding principal balance. Since the outstanding principal decreases with each payment, the interest component also decreases over time, while the principal repayment portion increases.
This is why making prepayments early in a loan term is so powerful — you reduce the principal balance on which future interest is calculated. A prepayment of ₹50,000 in year 1 of a 20-year home loan can save you over ₹2 lakhs in total interest.
The word 'amortization' comes from the Latin 'amortire' meaning 'to kill off' — you are gradually killing off the loan debt over time.
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