What does 'amortization' refer to in finance?

Amortization in finance specifically denotes the process of gradually reducing a debt through a series of scheduled payments over a designated period. This usually applies to loans, where the borrower makes consistent payments that combine both principal and interest. As payments are made, the principal amount owed decreases, leading to the eventual payout of the entire loan by the end of the term.

This concept is crucial for understanding various types of loans, such as mortgages and auto loans, where structured repayment schedules help borrowers manage their debts effectively. The focus on repayment over time helps ensure that both interest and principal are accounted for, facilitating better financial planning and cash flow management for individuals and businesses alike.