Finance Dictionary
Amortization
Definition
The process of spreading out a loan into a series of fixed payments over time, or the gradual write-off of an asset’s value.
Deep Dive
Amortization refers to two distinct but related concepts in finance and accounting. Firstly, it describes the process of gradually paying off a debt over a period through regular installments. Each payment in an amortization schedule consists of both principal and interest, with the proportion of principal increasing and interest decreasing over the loan's lifetime until the debt is fully retired. This method ensures predictable payments and a clear path to debt elimination.
Examples & Use Cases
- 1A homeowner takes out a 30-year mortgage with fixed monthly payments. Each payment amortizes a portion of the loan, slowly reducing the outstanding principal balance.
- 2A technology company purchases a patent for $1 million with an estimated useful life of 10 years. It will amortize $100,000 of the patent's cost each year as an expense on its income statement.
Related Terms
DepreciationLoan ScheduleIntangible AssetsPrincipalInterest