What does amortization mean in finance?

Amortization in finance refers specifically to the process of gradually paying off a loan over a specified period through regular, fixed payments. Each payment made during the amortization schedule typically consists of both principal and interest. Over time, as payments continue, the interest portion decreases while the principal portion increases, ultimately leading to the total loan balance being paid off by the end of the term. This systematic approach ensures that borrowers can forecast their financial obligations and manage their cash flow accordingly.

In the context of the other choices, the method of determining property value relates to appraisal techniques, while a financial plan for property investment encompasses broader strategies for managing assets and returns. Additionally, calculating interest rates involves evaluating how much interest is charged or earned, which, while connected to loans, does not define amortization itself. This clarity on amortization highlights its importance in loan management and payment structuring.