Amortization is a fundamental financial concept that often applies to loans and investments. It refers to the process of spreading out the repayment of a debt or the allocation of costs over time. When you make regular payments on a loan, a portion goes toward reducing the principal amount borrowed, while the rest covers interest. This gradual reduction of the debt through periodic payments is the essence of loan amortization. Understanding how amortization works is crucial for borrowers and investors alike, as it allows them to comprehend the breakdown of their financial obligations or investments over the life of the asset or loan.