amortization

Amortization

Amortization is the process of repayment of a loan with periodic payments of both principal and interest calculated to payoff the loan at the end of a fixed period of time. This would be trivial if interest weren't involved, since one could simply divide the principal amount into a certain number of payments and be done with it. The trick is to find the right payment amount, which includes some principal and some interest.

Amortization is used most often in mortgages (at least in the United States) and short-term loans, but the technique can also be applied to figure out how long it would take to pay off a given credit card debt (for example).

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