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How Amortization Works

What is Amortization?

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Understand amortization and you'll know how loans work

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Amortization is the elimination of a debt over time with periodic payments. For example, assume you make mortgage payments every month. A portion of that payment covers the interest you owe, and a portion of the payment pays down your principal.

The majority of each payment at the beginning of an amortization loan pays for interest. As time goes on, more and more of each payment covers your principal. You are then “amortizing” the loan.

Viewing Amortization in Action

If you want to see how amortization works, it’s best to look at an amortization schedule. It will show each payment on one line, and how the payment is applied to the loan. You can also see your remaining balance, and how much total interest you’ve paid over the life of the loan.

If you want to run some numbers, use our free amortization calculator. You can copy and paste the amortization schedule into Excel or any other spreadsheet program and continue to work with the numbers.

You can also calculate loans on your own or use a pre-built Excel loan calculator for amortization schedules.

Understanding the Amortization Concept

To get a better grasp of the concept of amortization, take an alternative look at the mathematics behind it. About.com’s Math expert has a nice article on how amortization works. Amortization is a financial concept used by investors. If you want to understand how investors evaluate amortization of business assets, read through Depreciation and Amortization on the Income Statement.

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