Over the length of the borrowing term, the loan’s book value gradually reduces in value until the outstanding balance reaches zero on the date of maturity. Principal Amortization → The principal payments, on the other hand, represents the gradual repayment of the original principal over the maturity term.the credit risk associated with providing debt financing to the borrower is factored into the interest rate by the lender. Interest Expense → The interest component reflects the cost of the borrowing, i.e.
In particular, there are two forms of payment associated with loans: 1) the interest expense and 2) the principal amortization. The borrower is required to fulfill payment obligations per the schedule laid out in the contractual agreement with the lender as part of the financing arrangement. The loan amortization schedule describes the allocation of interest payments and principal repayment across the maturity of the loan.
