Amortization is the process of gradually reducing or paying off a debt or loan over time. Amortization can be used when speaking about intangible assets as well. The term is used as an accounting technique to lower the value of the intangible asset. This can be thought of similarly to depreciation. Depreciation is the term used in accounting when discussing reducing the value of a tangible asset over time.
Amortization, in regards to loans, generally refers to practically equal monthly payments that, if paid according to the loan schedule, will pay off the entire loan balance by the maturity date. The maturity date is the date in which the loan will be considered paid in full.
This type of loan is considered to be fully-amortized. Lenders set up fully-amortized loans to have equal monthly payments. Keep in mind that the interest is “front-loaded.” This means that towards the beginning of the loan, most of the monthly payment will go towards paying interest, and only a small portion will lower the principal balance of the loan.
Over time, a smaller amount each month will be allocated to paying interest, increasing the proportion of the payment which reduces the principal balance. One of the most common examples of an amortized loan is a Home Mortgage Loan.
For more information on amortization, or the loan options that might be available, go to Liftcredit.com. Review the site for more financial terminology and to get in touch with financial and loan experts.
