a periodic payment plan to pay a debt in which the interest and a portion of the
principal are included in each payment by an established mathematical formula. Most
commonly it is used on a real property loan or financing of an automobile or other
purchase. By figuring the interest on the declining principal and the number of
years of the loan, the monthly payments are averaged and determined. Since the main
portion of the early payments is interest, the principal does not decline rapidly
until the latter stages of the loan term. If the amortization leaves a principal
balance at the close of the time for repayment, this final lump sum is called a
"balloon" payment.
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