Annuity (loan repayment)

Definition

In lending, an annuity structure repays a loan through a series of equal periodic payments. Each instalment is the same size, but its make-up shifts over time: early payments are mostly interest on a large outstanding balance, while later ones are mostly principal as the balance shrinks. This gradual clearing of the debt is amortisation.

In plain terms

It is the most common way a term loan is repaid, and its appeal is predictability — the same payment every month makes budgeting straightforward, even though the split between interest and principal inside that payment is quietly changing. The alternative structures, such as interest-only or a single bullet repayment at maturity, trade lower early outgoings for a larger sum later. To see how an annuity schedule builds for a given amount and term, use the business loan repayment calculator.