AMORTIZATION Meaning and
Definition
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Amortization is a financial term that refers to the process of gradually paying off a debt, typically through regular payments over a specified period. It is often used in the context of loans or mortgages, where borrowers repay the principal amount along with interest over time.
In the case of amortization, the total amount of the debt is divided into equal installment payments, which are usually made by the borrower on a monthly basis. These payments are structured in a way that a portion goes towards reducing the outstanding principal balance, while the remaining amount covers the accrued interest charges.
The amortization process spreads out the repayment of the debt over the entire loan term. This means that the early payments mainly consist of interest, while the later payments primarily contribute towards reducing the principal amount.
Amortization schedules are commonly used to illustrate the breakdown of each payment, showing the portion allocated towards interest and principal. As the debt is gradually repaid, the interest charges decrease over time, resulting in a higher proportion of each payment going towards the principal.
Amortization allows borrowers to systematically repay their debts, making it easier to manage and plan for future payments. It also ensures that lenders receive a steady stream of income and recoup their investments over the loan term.
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Etymology of AMORTIZATION
The word "amortization" derives from the Old French term "amortir", which means "to kill" or "to deaden". The root of this word comes from the Latin "ad mortem", which translates to "to death". Over time, the term "amortir" evolved in French to mean "to mitigate" or "to make smaller". In the financial context, "amortization" refers to the process of gradually reducing or paying off a debt or loan amount over a specific time period.
Similar spelling word for AMORTIZATION
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