Definition of 'Amortization'
Amortization is the disbursement of debt over an agreed upon time schedule. Often payments for consumer or home loans are amortized to allow the borrower an achievable time period to pay down the loan. Companies also amortize expenses for specific assets or intellectual property.
TheStreet Explains ‘Amortization’
Essentially, amortization is when an investor, company or borrower pays off a debt over a certain amount of time. A portion of each payment made by the borrower goes toward the principal of the loan and the other portion goes toward interest. In terms of mortgage loans, the initial payments going toward the principal is small with the majority going toward interest. However, over time payments end up being greater toward principal and less toward interest. Using an amortization calculator, borrowers can determine how much home or car they can afford. Borrowers use the loan amount they would like to borrow, along with the loan term and rate to determine their monthly payments. In the case of a vehicle or home purchase, buyers should also consider how much money they can use as a down payment before determining the loan amount they will need.
Some borrowers will pad their monthly payment with extra cash to begin paying toward the loan’s principal faster and reduce the loan term. As little as an extra $100 per payment can drastically shorten the loan length.
For businesses, amortization takes place when the company invests a certain amount of money in an intellectual property (intangible asset) like a patent or tangible assets such as equipment or a physical property that can depreciate. The company would amortize the total amount spent over a period of time to represent a balanced picture of the expense to asset ratio.
Corporate tax filers are able to take a deduction for amortized expenses that include patents, trademarks, eco-expenses (such as forestation, oil and natural gas investigation), bond premiums, etc.
Terms Related to 'Amortization':
When companies update or acquire physical or tangible assets, funds...
Articles Related to 'Amortization':
By TheMarker.com Staff | 09/17/01 - 11:44 AM EDT
By Melissa Davis | 06/24/04 - 06:41 AM EDT