Amortization is the process of paying off a debt (often a mortgage, auto loan, or personal loan) through regular payments over time. Each payment is divided between paying interest on the loan balance and reducing the principal amount.

In the early years of a loan, a larger portion of each payment goes toward interest, while in later years, more goes toward the principal. This gradual shift occurs because the interest is calculated on the remaining loan balance, which decreases with each payment.

The Amortization FormulaThe formula for calculating equal payments on an amortized loan is:

$$A = P\frac{r(1+r)^n}{(1+r)^n-1}$$A = payment amount per periodP = principal (initial loan amount)r = interest rate per period (annual rate divided by payment frequency)n = total number of payments (loan term multiplied by payment frequency)