What does "amortization" refer to in finance?

Amortization refers specifically to the process of gradually paying off debt through a series of regular, scheduled payments. Each payment typically includes both principal and interest, which allows the borrower to reduce the total loan balance over time until the debt is fully repaid. This structured repayment plan helps borrowers manage their debt and clearly understand how much they owe at any given time.

In the context of loans, amortization is particularly important because it ensures that the borrower pays off their debt in a systematic way, allowing them to budget effectively and avoid any unexpected large payments down the line. For mortgages, this means that the lender and borrower can predict the loan's lifecycle, including how much interest will be paid over time as the principal balance decreases.

The other options involve related concepts but do not accurately define amortization itself. While the total cost of a loan is a consideration in financing, it does not describe the amortization process. Similarly, the calculation of property value depreciation is about how real estate values decline over time, which is distinct from the concept of amortization.