Word Watch · Term 23 of 30 · 0:49
Amortization
ProductionIllustrated Click2CE lesson; AI-assisted production with Sarah narration
In brief
Amortization reduces a loan balance through scheduled payments; a typical level-payment fixed-rate loan has a changing principal-and-interest mix.
Example
Compare an early payment with a later one: the entire payment does not ordinarily reduce principal.
TranscriptRead along, or select a timestamp to jump there
- Watch a typical fixed-rate, level-payment loan over time.
- Amortization means scheduled payments reduce the loan's principal balance while
- also paying interest.
- Our bars show illustrative payment proportions, not a specific loan
- quote.
- Early on, more of the payment goes to interest.
- As principal falls, the interest portion usually shrinks and the
- principal portion grows.
- A fully amortizing loan reaches a zero balance at maturity
- if paid as scheduled.
- A partially amortizing loan leaves a balance to be paid
- at the end.
- Do not assume every scheduled payment goes entirely toward principal.
- Quick check:
- does the entire payment ordinarily reduce principal?
- No.
- Payments generally include both principal and interest.
