What does amortization refer to in the context of loans?

Amortization in the context of loans specifically deals with the process of paying off a loan over time through regular payments, which cover both the principal and the interest. When a loan is amortized, each payment decreases the amount of the principal debt, while also covering the interest charged for borrowing. This systematic reduction of the loan balance over the repayment period is crucial for borrowers to understand, as it illustrates how their total liability decreases as they make payments. Structured amortization plans help borrowers predict their remaining balances, simplifying financial planning and management of their obligations.

The other options focus on separate aspects of loans that do not adequately capture the concept of amortization. Understanding these details is key to grasping how loans operate throughout their term.