Loan Amortization Glossary: Key Terms Explained

Terms A–E

Amortization is the gradual repayment of a debt by periodic (usually monthly) installments of principal and interest. In the context of a loan, it means the process of paying off the balance with regular payments over time, so that the amount owed decreases with each payment.

An amortization schedule is a table showing regularly scheduled payments and how they chip away at the loan balance over time, including the breakdown of interest and principal per payment and the remaining balance.

Balance is the amount owed on a loan at a given time, often referred to as the remaining principal balance. It is the portion of the original loan amount that has not yet been repaid.

Accrued interest is interest that is earned by the lender and payable by the borrower, calculated each day on the unpaid principal balance.

Annual Percentage Rate (APR) is the total cost of credit expressed as an annual rate, including interest, fees, and other charges.

A balloon payment is an installment payment on a promissory note—usually the final one for discharging the debt—which is significantly larger than the other installment payments provided under the terms of the promissory note.

Capitalization is the addition of unpaid accrued interest to the principal balance of a loan, which increases the total debt outstanding.

Compounding is the addition of accrued interest to the principal balance, which results in interest being charged on both the original principal and previously accumulated interest.

• Amortization: Gradual repayment of debt via regular installments.
• Amortization schedule: Table showing payment-by-payment interest, principal, and balance.
• Balance: The amount owed on a loan at any given time.
• Accrued interest: Interest that accumulates daily on the unpaid principal.
• APR: Annual cost of credit, including fees.
• Balloon payment: A significantly larger final payment at the end of a loan.
• Capitalization: Adding unpaid interest to the principal balance.
• Compounding: Interest on both principal and accumulated interest.

Sources: University of California Office of the President, California Department of Financial Protection and Innovation, Calculator.net, TransUnion, Investopedia, Community First Credit Union

Terms F–J

A fixed-rate loan has an interest rate that is fixed, meaning it remains constant for the entire term of the loan. This provides predictable monthly payments.

An adjustable-rate mortgage (ARM) is a mortgage with an interest rate that can change, usually adjusted in response to market conditions.

Interest rate is the amount charged for borrowing money, expressed as a percentage of the loan amount.

• Fixed-rate loan: Interest rate stays the same for the whole term.
• Adjustable-rate mortgage (ARM): Rate can change over time.
• Interest rate: The cost of borrowing, as a percentage.

Sources: Calculator.net, Community First Credit Union

Terms K–O

Interest is consideration in the form of money paid for the use of money, usually expressed as an annual percentage. It is the cost of borrowing funds.

Loan term is the length of time a borrower has to repay a loan, such as a 30-year mortgage.

A mortgage is a type of loan used to purchase real estate, generally repaid through monthly amortized payments.

Negative amortization occurs when the monthly payment is less than the interest charged, causing the loan balance to increase.

• Interest: The cost of borrowing money, usually expressed as an annual percentage.
• Loan term: The duration of the loan.
• Mortgage: A loan for real estate, typically amortized.
• Negative amortization: Loan balance grows when payments are too small.

Sources: University of California Office of the President, California Department of Financial Protection and Innovation, Calculator.net, Community First Credit Union

Terms P–T

Principal is the original amount you borrowed, excluding interest and fees.

Rate, in the context of loans, refers to the interest rate, which is the amount charged for borrowing money, expressed as a percentage of the loan amount.

The amortization formula is M = P × [r(1+r)^n] / [(1+r)^n − 1], where P is principal, r is monthly interest rate, and n is total number of payments.

Extra payments toward principal can reduce total interest paid and shorten the loan term.

• Principal: The original loan amount.
• Rate: The interest rate charged on the loan.
• Amortization formula: M = P × [r(1+r)^n] / [(1+r)^n − 1].
• Extra payments: Can cut interest and shorten the term.

Sources: Calculator.net, TransUnion, Investopedia, Community First Credit Union

Terms U–Z

Underwriting is the process lenders use to evaluate an application for a loan, including deciding whether to approve or reject it and determining the terms of the loan if it's approved.

Variable rate is an interest rate that fluctuates, that can change over time according to the loan agreement or its reference rate.

• Underwriting: Lender's risk assessment process.
• Variable rate: Interest rate that can change over time.

Sources: Experian, Community First Credit Union

Cross-references to Related Pages

For a deeper explanation of how amortization works and how to calculate your payment, see our main guide on amortization. You can also use the home page to access our tools and resources.

• Read more about amortization on the main page.
• Visit the home page for calculators and other tools.