Amortization is the method of repaying a loan in regular installments where each payment includes both interest and principal, reducing the loan balance over time.
Amortization is a standard loan repayment system used in home loans, car loans, education loans, and personal loans. Under this system, the borrower pays a fixed EMI at regular intervals (usually monthly) for a predefined tenure.
In the initial years of the loan, a larger portion of the EMI goes toward interest, while a smaller portion reduces the principal. As time passes, the interest component decreases and the principal repayment increases. This structured reduction of the loan balance is known as amortization.
Lenders provide an amortization schedule that shows a detailed breakup of each EMI—interest paid, principal repaid, and remaining outstanding balance. This helps borrowers understand the true cost of the loan and plan prepayments effectively.
Amortization makes loan repayment predictable, improves financial planning, and allows borrowers to compare loan offers based on total interest outgo, not just EMI.
"If you take a home loan of ₹25 lakh for 20 years at a fixed interest rate, your EMI remains constant. However, in the first few years, most of the EMI goes toward interest. Over time, the principal repayment increases until the loan is fully amortized at the end of the tenure."