Amortization
What does it mean
Amortization refers to the period of time used to calculate the regular payments required on a loan. The amortization refers to the period of time, if during which regular payments are made, the loan will be paid to $0 upon the final payment.
Why does it matter
Loan amortization matters because lending is a balancing act. You must find a payment amount that the borrower can afford and that payment needs to payoff the loan before the underlying collateral loses its value. Even though all borrower’s would have an easier time paying a loan over 50 years, if the underlying collateral will have no value after 10 years, you are putting yourself at unnecessary collateral risk even if the lower payment decreases the customers repayment risk (capacity).
Other Relevant Terms
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