Amortization

Loading the player...

What is 'Amortization'

Amortization is the paying off of debt with a fixed repayment schedule in regular installments over a period of time. Consumers are most likely to encounter amortization with a mortgage or car loan.

2. The spreading out of capital expenses for intangible assets over a specific period of time (usually over the asset's useful life) for accounting and tax purposes. Amortization is similar to depreciation, which is used for tangible assets, and to depletion, which is used with natural resources. Amortization roughly matches an asset’s expense with the revenue it generates.

BREAKING DOWN 'Amortization'

1. With auto loan and home loan payments, at the beginning of the loan term, most of the monthly payment goes toward interest. With each subsequent payment, a greater percentage of the payment goes toward principal. For example, on a 5-year, $20,000 auto loan at 6% interest, the first monthly payment of $386.66 would be allocated as $286.66 to principal and $100 to interest. The last monthly payment would be allocated as $384.73 to principal and $1.92 to interest. At the end of the loan term, all principal and all interest will be repaid.

2. Suppose XYZ Biotech spent $30 million dollars on a patent with a useful life of 15 years. XYZ Biotech would record $2 million each year as an amortization expense.

The IRS allows taxpayers to take a deduction for the following amortized expenses: geological and geophysical expenses incurred in oil and natural gas exploration, atmospheric pollution control facilities, bond premiums, research and development, lease acquisition, forestation and reforestation, and certain intangibles such as goodwill, patents, copyrights and trademarks. Amortization can be calculated easily using most modern financial calculators, spreadsheet software packages such as Microsoft Excel or amortization charts and tables.

RELATED TERMS
  1. Amortized Loan

    A loan with scheduled periodic payments of both principal and ...
  2. Negative Amortization Limit

    A provision in certain loan contracts that limits the amount ...
  3. Fully Amortizing Payment

    A periodic loan payment, part of which is principal and part ...
  4. Negatively Amortizing Loan

    A loan with a payment structure that allows for a scheduled payment ...
  5. Amortized Bond

    A financial certificate that has been reduced in value for records ...
  6. Amortization Schedule

    A complete schedule of periodic blended loan payments, showing ...
Related Articles
  1. Professionals

    Amortization

    Amortization describes the paying off of debt in regular installments over a period of time.
  2. Economics

    Explaining Amortization In The Balance Sheet

    Amortization occurs when an asset’s value decreases over time, usually over its estimated useful life.
  3. Credit & Loans

    What is an Amortization Schedule?

    An amortization schedule is a table that shows the amounts of principal and interest that comprise each loan payment.
  4. Credit & Loans

    Mortgage Amortization Strategies

    Should you get a 30-year mortgage? A 15-year one? Ways to decide which mortgage is the best fit.
  5. Professionals

    Amortization and Accretion

    Amortization and Accretion
  6. Professionals

    Loans And Amortization

    Learn about the different types of loans.
  7. Professionals

    Other Depreciation Considerations

    We look at amortization, depletion and more for what businesses need to consider when using depreciation in their accounting.
  8. Credit & Loans

    Mortgage Basics: The Amortization Schedule

    By Lisa SmithThe amortization schedule for a residential mortgage is a table that provides a breakdown of the schedule of payments from the loan's first required payment to the loan's final payment. ...
  9. Investing

    Amortization

    Amortization and depreciation are two ways to prorate the cost of an asset's life. Learn more about the former and how it it's calculated.
  10. Home & Auto

    Choose Your Monthly Mortgage Payments

    Exotic mortgages allow you to decide how much to pay. Find out how much they really cost.
RELATED FAQS
  1. How should you choose the amortization period for your mortgage?

    Read about key considerations that homeowners should take into account before choosing the amortization period for their ... Read Answer >>
  2. How does one amortize intangible assets?

    Understand what distinguishes intangible assets and how companies are required to amortize their value over time to recover ... Read Answer >>
  3. What are the differences between amortization and impairment?

    Learn the differences between amortization and impairment as they relate to intangible assets held on a company's balance ... Read Answer >>
  4. Where do traders place orders when they identify ascending triangles?

    Learn which businesses are required to depreciate or amortize capital expenses, or CAPEX, and which businesses are eligible ... Read Answer >>
  5. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ... Read Answer >>
  6. What does amortization mean in the context of a pension plan?

    Discover when and why accountants use amortization techniques in the context of pension plans, and why those changes help ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center