What is Amortization?

Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Amortization”.

This is the process of paying off your debt in regular installments over a fixed period of time in one of two general manners.
1. The paying off of debt with a fixed repayment schedule in regular installments over a period of time. Consumers are most likely to encounter amortization with a mortgage or car loan.
2. The spreading out of capital expenses for intangible assets over a specific period of time usually over the asset's useful life for accounting and tax purposes. Amortization is similar to depreciation, which is used for tangible assets, and to depletion, which is used with natural resources. Amortization roughly matches an asset’s expense with the revenue it generates.
Your mortgage is amortized using monthly payments that are calculated based on the amount borrowed, plus the interest that you would pay over the life of the loan. In lending, amortization is the distribution of payment into multiple cash flow installments, as determined by an amortization schedule. Unlike other repayment models, each repayment installment consists of both principal and interest.

By Barry Norman, Investors Trading Academy