Amortization Calculator

What is Amortization?
Amortization is a financial concept with two primary meanings: one related to repaying a loan over time and the other to spreading the cost of a long-lived asset in business accounting. Below, I’ll explain both definitions in detail, provide examples, and clarify how they work in practice.

1. Amortization in Loan Repayment
   Amortization in the context of loans refers to the systematic repayment of a loan through regular payments, typically monthly. This is common for loans like mortgages, car loans, and personal loans. Each payment covers both interest (the cost of borrowing) and principal (the amount borrowed), gradually reducing the loan balance to zero by the end of the term.
   

   While the Amortization Calculator can serve as a basic tool for most, if not all, amortization calculations, there are other calculators available on this website that are more specifically geared for common amortization calculations.

   Mortgage Calculator	Auto Loan Calculator
   Investment Calculator	Business Loan Calculator
   Personal Loan Calculator	FHA Loan Calculator
   VA Mortgage Calculator	Annuity Calculator

    

How It Works

• Interest: Calculated on the remaining loan balance, so it decreases over time as the principal shrinks.
• Principal: The portion of the payment that reduces the loan balance, increasing over time as the interest portion declines.
• Fixed Payments: For most amortized loans, the total payment stays the same, but the split between interest and principal shifts.

Example

Imagine a 30-year mortgage with a fixed monthly payment. Early in the term, most of the payment covers interest because the principal is still high. As you pay down the principal, the interest portion shrinks, and more of each payment reduces the loan balance. This progression is detailed in an amortization schedule, a table showing each payment’s breakdown.

Loans That Aren’t Amortized
Not all debt follows this structure:

• Credit Cards: These are revolving debt, where the balance can vary month-to-month, and payments aren’t fixed. There’s no set amortization schedule.
• Interest-Only Loans: You pay only interest for a period, with the principal due later.
• Balloon Loans: These involve small payments initially, followed by a large final payment.
  Please use our Credit Card Calculator for more information or to do calculations involving credit cards, or our Credit Cards Payoff Calculator to schedule a financially feasible way to pay off multiple credit cards
  

2. Amortization in Business Accounting

In accounting, amortization refers to spreading the cost of an expensive, long-lived asset over its useful life. This is typically applied to intangible assets (e.g., patents, copyrights) but can also relate to tangible assets (though that’s often-called depreciation). The goal is to match the asset’s cost with the revenue it generates over time, avoiding a sudden expense spike.please visit the Depreciation Calculator.

How It Works

• Intangible Assets: Under U.S. law (Section 197), many intangibles are amortized over a set period, often 15 years.
• Tangible Assets: Items like machinery or buildings are usually depreciated, but the concept is similar—spreading the cost over time.

Examples

• Patent: A company buys a patent for $150,000 with a 15-year life. It amortizes $10,000 per year ($150,000 ÷ 15), deducting this amount annually from its financials.
• Goodwill: The value of a business’s reputation, amortized if it has a finite life.
• Startup Costs: In the U.S., certain pre-business expenses (e.g., consulting fees) can be amortized over 15 years once the business starts, per IRS rules.

Exceptions

Some assets, like goodwill with an indefinite life or self-created intangibles, may not be amortized for tax purposes.

Amortization Schedule

An amortization schedule is a table that outlines each payment on an amortizing loan, showing:

• The amount paid toward interest.
• The amount reducing the principal.
• The remaining balance after each payment.

This applies mainly to fixed-rate loans and doesn’t account for extra payments, fees, or variable rates (e.g., adjustable-rate mortgages or lines of credit).

Key Takeaways

• Loan Amortization: A structured way to repay loans over time, with payments covering interest and principal. The interest portion shrinks as the balance decreases.
• Accounting Amortization: Spreading the cost of long-term assets (especially intangibles) over their useful life to align expenses with revenue.
• Non-Amortized Debt: Credit cards and certain loans (e.g., interest-only, balloon) don’t follow a fixed repayment plan.