Amortization for Dummies
noun
pronunciation: ,æmərtɪ'zeɪʃənWhat does Amortization really mean?
Amortization is a finance term that is used to describe a method of paying off a loan, such as a mortgage or a car loan, over a set period of time. Let me break it down for you in the simplest way possible.
Imagine you borrow some money from a friend with the understanding that you will pay it back gradually, in small, regular installments. Amortization is basically doing that - paying off a debt in regular installments over time.
When you borrow money, the lender or the person you borrowed from wants something in return for lending you that money. This is usually called interest - it's like a charge for borrowing the money. So, when you make your installments, part of the money goes towards paying back the original amount you borrowed, and another part goes towards paying the interest.
Now, let's say you borrowed $1000 from your friend, and you agreed to pay it back over 10 months. If you were to pay the same amount every month, you are using the amortization method. By doing this, you are making sure that both the principal amount (which is the original $1000) and the interest get paid off little by little, over the 10 months.
Think of it as eating a pizza - you don't gulp the entire pizza in one bite, right? You take small, satisfying bites until the whole pizza is finished. Similarly, with amortization, you are taking small bites out of your loan until you have repaid the whole amount, plus the interest.
So, to summarize, amortization is the process of paying off a loan gradually, with regular payments, in a way that includes both the principal amount and the interest. It helps you take control of your debt and manage it over time.
Revised and Fact checked by Emma Williams on 2023-11-06 04:42:36
Amortization In a sentece
Learn how to use Amortization inside a sentece
- When you buy a house and take a loan from the bank, you have to pay back the money little by little over time. This process of repaying the loan in small, regular payments is called amortization.
- If you borrow money to buy a car, the bank or the dealership might give you the option to pay back the loan over several years with fixed monthly installments. This is also an example of amortization.
- Imagine you want to start a small business and need some money to get started. You might ask a friend to lend you the money and agree to pay it back over time in equal portions. This method of repayment is called amortization.
- Sometimes, people take out loans to pay for their education. Instead of paying all the money back at once, they can choose to make smaller payments over a long period. This way of repaying the loan is known as amortization.
- Let's say you want to buy a new phone that costs a lot of money. If you don't have the full amount, you can get a loan from the bank and return the money gradually each month. This process is called amortization.
Amortization Synonyms
Words that can be interchanged for the original word in the same context.
Amortization Hypernyms
Words that are more generic than the original word.