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Written By: Yekin, Staff Writer,
Are you confused how your interest rate or assets lifespan is calculated? Are you paying more interest and not the loan capital? Amortization meaning is all you need to understand the system.
The term amortization is an accounting skill that is used occasionally to lower the value or amount of a loan or an intangible asset like; royalty, franchising etc over a particular period.
Amortization is a technique in accounting that played a dual function of bridging down value or lowering the cost of an intangible asset.
Concerning a loan, amortization is focused on extending loan payments over time. When applicable to assets management, it’s likened to a depreciation of intangible assets price.
Amortization thus referred to two scenarios which are: amortization, which is used to process settling of debt via regular principal and interest payments over time. Amortization is used to bring down the present balance of a loan. For an instance, the mortgage truck loan – through instalment payments.
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And secondly, amortization means the practice of spreading out capital expenses that are related to intangible assets over a particular period for accounting and tax purposes.
Therefore, the concept of amortization is a technique that is used for the dual function of either settling loans or extending capital expenses.
If you have in any way transacted with a mortgage bank, you may have heard the term “Amortization thrown around”. This may be a confusing or pressurizing concept to understand however, amortization in this form is very simple to understand.
Amortization of a loan, in a simple term, is the way or process of paying back a loan over some time through making regular payments on a predetermined fixed schedule.
It’s referred to as the process or ways of settling debt over a period through regular instalments of principal and interest which is enough to pay the loan back in full by its fixed or maturity date.
A larger percentage of the flat monthly payments go toward interest early in the loan, but with each payment made subsequently, the higher percentage of it goes toward the loan’s principal.
The key feature of amortization of a loan is that the loan is balanced off in a particular timetable via steady or regular payment which was designed to meet the schedule. The payment of this loan install mentally does not signify that all the payments brought forward must be equal with each other except in some cases.
The amount brought forth can be higher than each other. The main objective is to complete the payment at a fixed time.
In the case of a fixed-rate mortgage, that loan is often amortized by ensuring regular and equal payment of the loan by the strict schedule. For instance, if you are given a 10 years fixed-rate mortgage, you have to pay the same amount every month for 20 years till the loan is settled.
As initially stated, amortization of a loan does not necessarily mean paying off debt through the steady payment on a regular schedule but rather, it refers to the rate at which you pay down the principal on the loan as well.
That’s just as paying off the loan or debt is compulsory so the principal too, the reason is; when you take a long term loan like a mortgage, your monthly payments go toward interest cost during the initial stages of the loan. This is because interest is still included on your loan or debt balance and in the early time, you don’t have much chance to cut down the principal.
As time goes on when your loan balance gets smaller, the majority of your payment can now go toward the mortgage principal and thus, you can start paying the balance which will be even faster.
Amortization of loan can be duly calculated using some of the most modern sophisticated financial calculators, spreadsheet software packages like Microsoft excels or even amortization online calculators.
Amortization of loan schedules starts with the loan balance at hand. To know the amount paid monthly, the interest payment is calculated by multiplying the interest rate by the outstanding loan balance and dividing it by 12.
The amount of principal due in a particular month is the total payment made monthly minus the interest payment for that month.
Amortization of loan table usually reveal to the debtor how much of the monthly payment made will go towards principal and interest and as well how that mix changes over the life of a loan.
For instance, if a loan of N100, 000,000 that should be paid in 5 years with an interest of 10% is amortized, at the beginning of the payment, most of the payment made shall go toward the interest thus slowing your pace down in paying down the loan on time. However, this change as you gets closer to your payoff date.
In this regard, amortization is the method of increasing the cost of an asset to expense over its expected fixed period of usage thus, shifting the assets from the balance sheet to the income statement.
It shows the usage of an intangible asset such as; copyrights, licenses, patents, trademarks etcetera over its useful life.
Amortization of intangible assets is calculated similarly to depreciation which is used for tangible assets like buildings, vehicles and other assets that are physical wear and tear.
The amortization of intangible assets is also helpful in planning tax. The internal revenue service (IRS) gives taxpayers the freedom to reduce taxes for certain expenses such as geological and geophysical expenses incurred in oil and natural exploration, atmospheric pollution control facilities and the like.
This is amortization meaning. You must have learnt a lot from the pieceof writing. Appreciate by sharing this insight.
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Published origninally on 16th Feb 2022 13:11:02
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