What does amortization refer to in finance?

Amortization in finance specifically refers to the process of reducing a loan balance over time through a series of periodic payments. Each payment made includes both principal and interest components, leading to a gradual decrease in the total outstanding loan amount. This is common in loans such as mortgages or car loans, where borrowers repay the loan over a specified term via regular installments.

Additionally, amortization is also often utilized in the context of intangible assets, where companies spread the cost of an intangible asset over its useful life. However, in the context of this question—focused on loans—amortization is firmly anchored in the reduction of debt through successive payments. This understanding is crucial for anyone involved in finance, as it affects cash flow management and financial planning for both individuals and businesses.