What does amortization refer to in finance?

Amortization in finance specifically refers to the gradual process of paying off a debt through a series of regular payments over a specified period. Each payment typically consists of both principal and interest, allowing the borrower to reduce the outstanding balance of the loan systematically. This method is commonly used for loans such as mortgages or car loans.

By breaking down the total amount into manageable chunks, borrowers can clearly see how their debt decreases over time and gain a better understanding of how much of each payment goes toward interest versus principal. The structured approach of amortization not only provides predictability in payments but also aids in financial planning by allowing individuals to anticipate future obligations.