# Amortization

Another Day, Another Dollar

## What is amortization?

Amortization is a way of paying off a debt by spreading payments over a period of time. Payments are divided into equal amounts for the duration of the loan, making it the simplest repayment model.

### You are likely to have it when dealing with:

• Mortgage payments
• Car loans

## How is it calculated?

• A = periodic amortization payment
• P = principal amount borrowed
• r = periodic interest rate divided by 1,200
• n = total number of payments

For example, if you borrowed \$100,000 at an interest rate of 10% and you wanted to make 60 total payments, your periodic amortization payment would be . . .

You would make a payment of \$2,125 every month for five years to pay off your loan.

## What is an amortization schedule?

It is a table that shows how much each payment will be and over how long a period to pay back the loan. It is usually a blend of payments for the actual loan amount and the interest owed.

## Components

Beginning balance: how much you have left to pay at the beginning of the year

Interest: how much you pay toward interest

Principal: how much you pay toward the principal amount

Ending Balance: how much you have left to pay at the end of the year

An amortization payment consists of a payment applied to both the interest and principal balance of a loan.

Calculator: How much will you have at retirement?

Initially, a large portion of each payment is devoted to interest. Over time, larger portions go toward paying down the principal.

This is the schedule for the previous example of a principal amount of \$100,000 at an interest rate of 10% over five years.

## Amortization vs. Depreciation

Amortization: used with intangible assets, such as goodwill, copyrights, and patents

Depreciation: used when dealing with tangible assets, such as buildings, machinery, and equipment

## Fun facts:

• The word “amortization” comes from Middle English “amortisen,” meaning to kill or alienate and from the Latin words “ad” and “mort,” meaning death.
• There is such a thing as Negative amortization when you don’t pay interest on the loan, so the amount you owe actually goes up instead of down.
• The most popular period of amortization in Canada is 25 years. About three-quarters of Canadians who have a mortgage have selected a 25-year amortization.

## References

1. https://en.wikipedia.org/wiki/Amortization