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Ammortization 101: Everything you need to know
Do you know why your loan repayment installments start off heavy on interest and light on principal? That’s due to amortization. From home loans to car EMIs, amortization helps you repay debt in a structured and predictable way.
Defining Amortization
Amortization can be defined as the process of breaking down a big loan or the cost of an asset into fixed, regular payments that are spread out over time. This ensures that you don't need to pay the full sum upfront, instead repay it in monthly instalments that cover both interest and principal amounts as per the loan terms.
Example:
Assume that you have taken out a loan with the following terms:
- Sanctioned Amount: ₹2 lakhs
- Tenure: 5 years
- Interest Rate: 10% per annum
This EMI stays constant, but as per the loan terms, the interest part gets smaller while the principal part grows with each passing month. Over time, a larger piece of your EMI chips away at the actual loan amount.
What makes Amortization important?
Amortization brings clarity to your debt repayment schedule by breaking down big loans into smaller, fixed EMIs. Each EMI includes parts of both interest and principal, so you can gradually repay the entire amount owed with ease.
Initially, a larger portion of your EMI goes toward interest, while later payments focus more on the principal. This predictable structure helps avoid financial surprises and supports long-term planning. In short, amortization makes borrowing manageable and your financial journey more stable.
Conclusion
Amortization is much more than a mere technical term in finance. It is an integral pillar for stress-free repayments, better investments, and a brighter financial future.
Disclaimer: This article is for information purposes only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
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