Amortization is the elimination of a debt over time with periodic payments. The equal monthly payments of principal and interest over a specified period of time will completely pay off an amortized loan. If you want to see how amortization works, it is best to look at an amortization schedule.
For example, assume you make a school loan payment every month. A portion of that payment covers the interest you owe, and a portion of the payment pays down your principal. The majority of each payment at the beginning of an amortization loan pays for interest.
Interest on amortized loans is paid in arrears, and more interest is paid during the early period of the loan than at the end of the loan. As time goes on, more and more of each payment covers your principal. You are then "amortizing" the loan.
It is usually used in conjunction with a time frame. The longer the term is for a loan the slower it amortizes. This slower amortization means a lower monthly payment. However, it can also mean more interest paid out over the life of the loan.
For a graduate, finances are usually very tight and starting out with small monthly payments is a great help at first. As your life changes and salary improves you then can make the necessary adjustments, such as additional payments to this loan. And this is something you really should do.
Now remember, on this type of loan the payments are small because of the wide spread and you are mainly paying on the interest. In the long run this loan can cost you thousands of unnecessary money. You have great control on this style of loan that is why it works so well for college students.
Every penny you pay on your loan over the interest-only level is used to pay off the principal (which is really your school loan). Borrowers can shorten the loan period by paying more principal with each payment. Therefore, your loan would be paid off and you would save the thousands you would have been paying in interest.
Incurring debt and making series of payments to reduce this debt is something we all do in our lifetime, as we are given sufficient time to pay down the amount of transaction. This is referred to as "amortizing" a debt, a term that takes its root from the French term 'amortir.' Interesting to note, 'amortir' is the act of providing death to something.
