A loan that is paid back in equal periodic installments. An installment constitutes varying portions of principal and interest over the term of the loan. Typically, the principal amount of the loan decreases gradually in line with periodic payments made by the borrower to the lender over time. At the end of the term of the loan, principal outstanding is zero and there is no terminal balloon payment. The interest rate charged to the borrower may be fixed or variable. Under a fixed interest rate, the payments necessary to amortize the loan are fixed. Usually, lenders tend to adjust the rate on a periodical basis (such as 6 months: 6-month LIBOR) to take account of latest development in interest rate movements.
An example of amortizing loan is a home mortgage loan.
Amortizing loans come in two main forms: partially amortizing loans and fully amortizing loans.
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