What does amortization refer to in lending?

Amortization refers to the process of paying off a debt gradually through scheduled payments over time. This typically involves making regular monthly payments that consist of both principal and interest portions, effectively reducing the total outstanding balance until the loan is fully paid off by the end of the term. This systematic approach helps borrowers manage their debts and understand how much they are repaying over time.

The other options address different aspects of lending and financing. For instance, calculating interest rates involves various methodologies and formulas, while the total cost of borrowing a loan would encompass interest, fees, and any other associated costs rather than focusing solely on the gradual repayment of the principal. Initial payments on loans, often referred to as down payments, are another component but do not capture the ongoing repayment process that amortization specifically describes. Thus, the definition of amortization is centered on the gradual reduction of debt through an established payment schedule.