Description
Loan amortization refers to the process of gradually paying off a loan over time through regular installment payments, which consist of both principal and interest components. The amortization schedule outlines the breakdown of each payment, detailing how much of it goes towards reducing the loan balance (principal repayment) and how much is allocated towards paying interest on the outstanding balance. In the early stages of the loan term, a larger portion of each payment goes towards interest, while over time, a greater proportion is applied to reducing the principal balance. The calculation of loan amortization involves using mathematical formulas to determine the periodic payment amount based on the loan amount, interest rate, and loan term, and then recalculating the remaining balance and interest portion for each subsequent payment. This process continues until the loan is fully repaid, ensuring that borrowers gradually eliminate their debt obligations while lenders receive interest income over the loan term.