Definition and Examples of Amortization Process
The amortization process is the process of dividing a loan into a series of fixed installments. The loan is repaid at the end of the amortization schedule.
How the Amortization Process Works
The best way to understand the amortization process is to review an amortization schedule. If you have a mortgage loan, the schedule is included with your loan documents.
Types of Loans Subject to the Amortization Process
There are many types of loans available, and not all operate in the same way. Loans that are subject to the amortization process include:
Credits and Loans That Do Not Operate on an Amortization Basis
Some forms of credit and loans are not subject to the amortization process. These include:
Benefits of the Amortization Process
It is beneficial to consider amortized payments to understand how borrowing works. Consumers often make decisions based on the manageable monthly payment, but interest costs are a better way to measure the actual cost of what you are purchasing. Sometimes a lower monthly payment means you will pay more interest. For example, if you extend the repayment period, you will pay more interest compared to a shorter repayment term.
Source: https://www.thebalancemoney.com/how-amortization-works-315522
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