What is Loan Amortization?

Loan Amortization is a process where equal amount of monthly loan payments are made, with an interest portion and a principal portion.

Mortgage loans are prime examples of Amortized Loans. They have very long payment terms e.g. 30 years.  Interest portion, during the earlier months of the loan, is higher and principal portion is on the lower side.

Advantage of such a loan is that borrowers can plan their monthly expenses as the payments are fixed. But there are some disadvantages attached to this loan. In case of a home loan, for example, as interest constitutes a larger portion of the loan during earlier months of the loan, the borrower can only equitize small portions of payments made. Though, this can be overcome by paying extra payments and asking the lender, which may be a bank or some lending agency, to adjust these against the principal only.