How Amortization Works

Amortization: Cheat Sheet

Stuff you need to know:

  • Amortization is a method for paying off both the principal of a loan and the interest in one fixed monthly payment over a set period of time. Once you set the terms the loan -- the amount you're borrowing, the interest rate and the length of the loan -- you can easily calculate your monthly payment.
  • Amortization of home loans (mortgages) makes buying a home more affordable. The downside is that you pay much more total interest over the length of the loan.
  • Amortization is also a term used in business accounting. In this case amortization refers to the accounting practice of spreading a big expense (loss) over a number of years rather than reporting it all at once.
  • Depreciation is the accounting method for spreading out the expense of "tangible" assets like machinery or vehicles. Amortization is the accounting method for covering "intangible" assets like intellectual property (copyrights, trademarks, brand names), franchises, licenses, and permits.

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