Also called: Amortization, Principal and interest
Amortisation
Amortisation is the gradual repayment of a loan's principal through regular instalments that also cover interest. Early repayments are weighted toward interest, and the principal component rises as the balance falls.
What is an amortisation?
Amortisation is the gradual repayment of a loan's principal through regular instalments that also cover interest. Early repayments are weighted toward interest, and the principal component rises as the balance falls.
Example
In month one of a $100,000 five-year loan most of the payment is interest; by year four most of the same payment reduces principal.
Why it matters
It explains why paying out a loan halfway through leaves more owing than half the original amount.