Amortization

Amortization is a kind of payment plan for a loan in which part of each payment is allocated to interest and the remainder of each payment is applied to reducing the principal owed on the loan. Because the principal is decreasing with each payment, the interest due decreases as well, which means that over time, the proportion of each payment available to be applied to principal increases.

As a result, at the beginning of an amortized loan, a small amount of each payment goes to principal, but by the end of the repayment period much more of each payment is actually reducing the amount of the original loan. Sometimes the final payment will be all principal (called a balloon payment).