What is Amortization?

Amortization is the process of paying off a debt, such as a car loan or your mortgage, with a fixed repayment schedule with regular payments for a specified time period.

Amortization for Loans

With amortization referring to loans, most of the monthly payments at the beginning of the loan term goes toward the interest. As each payment is made, more of the payment goes toward the loan's principal.

This payment scheme applies to car and home loan payments, as well as mortgages.

Amortization for Intangible Assets

Amortization also refers to the way that companies spread out expenses for intangible assets for the asset's duration for the purposes of accounting and taxation. An intangible asset is any non-physical asset that is useful for greater than a year.

This is different from depreciation, where tangible (physical) asset expenses are spread out for the duration of the asset's usefulness.

For example, if a business owners buys printer ink in 2017, he or she will write off the cost in 2017 and probably use all of the ink in 2017.

However, if a business owner purchases a patent useful for 10 years, he or she will write off the expense incrementally for the duration of the asset.