Amortization refers to the systematic repayment of a debt or the allocation of intangible asset costs over a fixed period through regular installments. This process ensures debts or costs decrease incrementally over a predetermined timeline.
In financing and lending, amortization describes how loans—such as mortgages, auto loans, or personal loans—are paid off over time. Each periodic payment includes both principal and interest. Typically, earlier payments primarily cover interest, while later payments increasingly reduce the principal amount owed. The repayment schedule, known as an amortization schedule, specifies precisely how much of each payment contributes to the interest versus the principal balance.
In accounting, amortization also applies to intangible assets, like patents and trademarks, distributing their costs evenly throughout their useful lives. This method helps businesses accurately represent the diminishing value of these assets within their financial statements.
Overall, amortization provides clear insights into loan repayments or asset value reductions, making it essential knowledge for borrowers, lenders, and accountants alike. Understanding amortization is crucial when managing loan obligations, budgeting effectively, or correctly representing company assets.
