Definition
Loan Amortization
Amortization is the process of paying off a loan through scheduled instalments, with each payment split between interest and principal.
Amortization describes how a loan is gradually paid down. An amortization schedule lists every EMI and shows how much goes to interest versus principal and the outstanding balance after each payment. Early instalments are interest-heavy; later ones are principal-heavy.
Understanding the schedule reveals why prepaying early is so powerful — it cuts principal when the interest burden is highest, saving more total interest than prepaying near the end.
Lenders provide an amortization table at sanction, and reviewing it helps you decide between a shorter tenure, extra prepayments, or a balance transfer to a cheaper rate.
Related terms
- Balance Transfer (Loan)A loan balance transfer moves your outstanding loan from one lender to another, usually to get a lower interest rate.
- EMI (Equated Monthly Instalment)An EMI is the fixed monthly payment you make to repay a loan, combining both principal and interest.
- Prepayment & ForeclosurePrepayment is paying part of a loan ahead of schedule, and foreclosure is repaying it fully before the tenure ends; both reduce interest, subject to any applicable charges.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.