Amortization is the process of gradually paying off a loan through regular payments that cover both interest and principal, so the loan is fully paid at the end of the term.
Key Characteristics
Each payment includes interest + principal
Early payments are mostly interest
Later payments are mostly principal
Loan balance decreases over time
A fully amortized loan has a zero balance at maturity
What You Need for Exam Calculations
Loan amount (principal)
Interest rate
Loan term (years)
Payment amount (if provided)
Number of payments made (to find remaining balance)
Common Exam Scenarios
No payments made
Loan balance = original loan amount
Some payments made
Loan balance = original loan amount − principal paid