Amortization

Definition

Amortization is an accounting technique used to periodically lower the book value of a loan over a set period of time. When it comes to a loan, amortization focuses on spreading out loan payments, which are divided between principal and interest.

Example

When you get a 30-year mortgage, your monthly payment includes both principal and interest. The amortization schedule shows exactly how much of each payment goes towards reducing your loan balance versus paying interest, with the principal portion increasing over the life of the loan.