Legal Definitions - amortize

To amortize means to gradually pay off a debt over a period of time through a series of regular, scheduled payments. Each payment typically includes a portion of the original amount borrowed (the principal) and the interest accrued. Over the life of the loan, the proportion of principal paid increases, while the interest portion decreases, until the entire debt is extinguished.

• Residential Mortgage: When an individual buys a home, they often take out a mortgage loan for a term like 15 or 30 years. Every month, they make a fixed payment to the lender. This payment is amortized, meaning a portion goes towards paying down the principal balance of the loan, and another portion covers the interest for that period. Over decades, these consistent payments systematically reduce the outstanding principal until the home is fully owned.

  How it illustrates the term: The mortgage debt is extinguished gradually through a structured series of payments, each contributing to both principal reduction and interest, which is the core concept of amortization.

• Small Business Loan: A small business might secure a loan to purchase new equipment or expand its operations. The loan agreement will specify a repayment schedule, perhaps monthly payments over five years. Each payment the business makes is amortized, systematically reducing the principal balance of the loan while also covering the interest charged. By the end of the five-year term, the loan will be fully repaid.

  How it illustrates the term: The business loan is paid off in a planned, incremental fashion over a set period, with each payment chipping away at the principal and interest, demonstrating the gradual extinguishment of debt.

• Student Loan Repayment: After graduating, a student begins repaying their student loans. These loans are typically structured with an amortized repayment plan, often over 10 to 25 years. Each monthly payment contributes to both the principal amount borrowed and the accumulated interest. Initially, a larger portion of the payment might go towards interest, but as payments continue, more of each payment goes towards reducing the principal balance until the loan is fully satisfied.

  How it illustrates the term: The student loan debt is systematically reduced to zero through a series of regular, calculated payments that cover both the original loan amount and the cost of borrowing, which is the essence of amortization.