What term describes the reduction of a loan balance through payments made over time?

The term that describes the reduction of a loan balance through payments made over time is amortization. This process involves making regular payments that cover both the principal and interest over the life of the loan, ultimately leading to the complete repayment of the loan amount. Amortization is commonly used in the context of mortgages and other types of installment loans, where the borrower pays a set amount at regular intervals, gradually reducing the remaining balance until it reaches zero.

The concept of amortization emphasizes how the loan's structure supports the borrower in managing debt effectively through predictable payment schedules. Understanding amortization is crucial for borrowers to assess their financial obligations and for lenders to formulate loan terms and conditions.

In contrast, depreciation refers to the decrease in value of an asset over time, typically applicable to physical assets, rather than loans. Application simply indicates the act of applying something, lacking a specific financial context related to loan repayment. Interest adjustment generally pertains to changes in the interest rate rather than the repayment structure of the loan itself.