Amortization

Definition

Amortization is the process of paying down a loan over time with scheduled payments that include both interest and principal.

Example

In a 30-year mortgage, early payments are mostly interest, but the principal share increases over time.

How to use it

• Early payments are mostly interest; principal share grows over time.
• An amortization schedule shows the split between interest and principal each period.
• Longer terms lower monthly payments but increase total interest paid.
• Prepayments reduce interest and shorten the effective term.
• Use the schedule to forecast cash outflows and remaining balance.

Common mistakes

• Assuming the interest share is constant over the term.
• Comparing loans without aligning term length and compounding.
• Ignoring fees that change the effective rate.
• Using amortization schedules with mismatched payment frequency.
• Confusing accounting amortization with loan amortization.

Why this matters

This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.

Practical checklist

• Write a 1-line definition for "Amortization" that your team will use consistently.
• Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
• Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
• Use a calculator that references this term (e.g., Loan Payment Calculator) to sanity-check assumptions.
• Read the related guide (e.g., Loan amortization: how monthly payments and total interest work) for context and common pitfalls.

Where to use this on MetricKit