Amortization

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Definition

Amortization is the systematic repayment of a loan over time through fixed periodic payments. Each payment is split between interest and principal. In the early months, a larger share goes toward interest; in later months, more goes toward principal.

An amortization schedule is a detailed table showing each payment’s breakdown into principal and interest, along with remaining balance. Understanding amortization helps borrowers make informed decisions about prepayments, balance transfers, and refinancing.

Frequently Asked Questions

What is an amortization schedule? ▾
A table detailing every periodic payment, showing the split between principal and interest for each EMI, along with the remaining balance after each payment.
Why is more interest charged at the beginning? ▾
Because interest is calculated on outstanding principal, which is highest at the start. As you pay and principal reduces, the interest portion of each EMI shrinks.
How does amortization affect prepayment decisions? ▾
Prepayments made earlier save more interest because they reduce the outstanding principal when it is highest, yielding larger savings over the remaining tenure.
Why It Matters

Understanding amortization helps borrowers see how repayments are structured and identify the best time for prepayments. Early prepayments have a much larger impact on total interest.

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