Amortization refers to the process of reducing a debt with regular payments. If you have taken a loan or are planning to take one, you might want to read this article about amortization.
Read on to understand how amortization works, its types, how it’s calculated, and much more.
Amortization refers to spreading the loan amount into a series of fixed payments. Eventually, the loan is paid off when the amortization schedule ends. Furthermore, it’s about how the loan payment is applied to different types of loans. While the monthly payments you must make remain the same, your loan balance reduces by dividing the monthly payment among interest costs. The last payment you make shall pay off the final amount that remains on your debt.
Here’s how amortization works in a few simple steps:
The types of amortization can be classified based on their application areas, including real estate and business:
Here’s the generally accepted formula for calculating amortization:
Principal Payment = TMP − (OLB × 12 Months / Interest Rate)
Total Payment = Loan Amount × [(1+i) n−1i×(1+i) n]
Here’s a step-by-step process to calculate amortization:
To avoid the complicated mathematical calculation, you can also make use of any of the online loan amortization calculators
For example, you have a loan outstanding amounting to Rs.50,000. If you pay Rs. 10,000 of the principal yearly, Rs.10,000 of the loan amount has been amortized yearly. Furthermore, you should record Rs.10,000 in your books as an amortization expense each year.
Listed below are the primary benefits of amortization:
Consider paying back a loan without a repayment schedule. Making a one-time payment towards the final repayment of the loan could be practically impossible, considering the huge amount of principal and interest, especially in loans like a home or a car.
Repayment of large sums of payments towards a loan can also set your personal and financial objectives back for years. You can better organise your finances by managing huge loan repayments with amortization. This repayment method also gives the management of your debt top priority.
With an amortization calculator, you can see how different loan options affect your monthly payments. Changing the inputs, including interest rate, loan term, and the amount borrowed, will let you know what your monthly payment will be, how much each payment will go toward principal and interest, and what will be your total interest obligation over the lifetime of the loan.
Any loan with fixed monthly payments and a defined end date can be calculated using the amortization calculator, regardless of whether it is a student loan, auto loan, or fixed-rate mortgage.
The amortization process involves spreading out a debt over the loan tenure. Payments are made according to the amortization schedule until the loan is repaid in full. A portion of each payment goes toward interest costs and your loan balance.
The more you pay toward your balance, the less interest you will have to pay. You can also understand how your payments are applied with the help of an amortization table. Common examples of amortizing loans are car, home, and personal loans.
Ans. Negative amortization occurs when the debt grows even when you pay on time. It happens due to the interest on the loan being higher than the amount of each payment.
Ans. Both amortization and depreciation attempt to capture the costs associated with holding an asset over time. However, the primary difference between them is that amortization refers to intangible assets, while depreciation refers to tangible assets.
Ans. The loan amortization schedule can be used to calculate the amortization rate. In an amortization schedule, the percentage of interest payments decreases slightly with each amount; however, the percentage of principal payments increases.
Ans. Over the lifetime of a fixed asset, such as a computer or car, amortization expenses are incurred. When an amortization expense appears on the income statement, the intangible asset’s value is reduced by the same amount. It continues until the asset is either sold or substituted.
Ans. Amortization can only be applied to intangible assets.
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
BBMP Property Tax – How to Calculate, Check Status and Pay Tax?The Karnataka State Government imposes this tax on the residents of the State who own properties in... Read More »
Union Bank of India Home Loan Interest Rate April 2023Union Bank of India offers up to 90% of the property value as home loan. Union Bank home loan inter... Read More »
Hartalika Teej in India 2023 – Muhurat and Rituals (18th Sept)Hartalika Teej is an auspicious festival for Hindu women. The day is mainly dedicated to Goddess Pa... Read More »
Stamp Duty in Thane 2023 – Property Registration ChargesIn India, every State government levies a stamp duty on property transfers. The location, type of p... Read More »
Stamp Duty in Karnataka 2023 – Property Registration ChargesIf you have recently purchased a property in Karnataka, you are liable to pay stamp duty in Karnata... Read More »
Stamp Duty and Property Registration Charges in TelanganaThe state government in India is in charge of defining rules and standards and managing the collect... Read More »
Stamp Duty and Property Registration Charges in PuneStamp duty and registration charges need to be paid to the state government to register your proper... Read More »