What It Means
In a fully amortized loan, each periodic payment will pay the interest accrued in the previous period and a portion of principal. As a result, the interest cost in the subsequent period is smaller than the previous period. Over time the proportion of payments that is applied towards principal increases with the effect that the last payment will pay off all remaining principal balance. Amortization creates equal monthly payments, sometimes known as equal monthly instalments (EMI). With the equal payments, the borrower can plan the cash flows and build a budget.