Amortization Calculator

What is Amortization?

Amortization has two related meanings. In lending, it is the process of paying off a debt with regular, equal payments that cover both interest and principal, so the balance reaches zero at the end of the term. An amortization schedule is the table that lists every payment and shows how much goes to interest, how much to principal and what balance remains. In accounting, amortization means spreading the cost of an intangible asset over the years it is useful, much as depreciation does for physical equipment.

Paying Off a Loan Over Time

With an amortizing loan, the payment stays the same but its makeup changes every month. Interest is charged on the outstanding balance, so early payments are mostly interest. As the balance falls, the interest portion shrinks and more of each payment goes to principal, which in turn speeds up the decline in the balance.

Take a $200,000 loan at 6% for 15 years. The monthly payment is $1,687.71. In the first month, $1,000 of that is interest (0.5% of $200,000) and only $687.71 reduces the balance. Principal does not overtake interest until the 43rd payment, and by the final payment interest is only about $8. Over the full term the borrower pays about $103,788 in interest.

Extra payments go straight to principal, so they cut every future interest charge. Adding just $100 a month to that same loan pays it off 15 months early and saves about $10,000 in interest. Use the extra payment options to test monthly, yearly or one-time amounts, and check your loan terms for any prepayment penalty first.

Common amortizing loans include mortgages, auto loans, student loans and most personal loans. Credit cards and lines of credit are not amortizing in this sense: the required payment changes with the balance and there is no fixed payoff date. Interest-only and balloon loans are also structured differently, deferring principal to later in the term.

Payment = P × r(1 + r)ⁿ ÷ [(1 + r)ⁿ − 1] · Interestₖ = Balanceₖ₋₁ × r

P

loan amount

r

monthly interest rate (annual rate ÷ 12)

n

number of monthly payments

Each month, interest is the previous balance times the monthly rate; the rest of the payment reduces the balance.

Spreading Costs

In business accounting, amortization spreads the cost of an intangible asset over its useful life instead of recording it all as an expense in the year of purchase. Intangible assets include patents, copyrights, trademarks, software, licenses, franchise agreements and customer lists acquired from another company. A patent bought for $100,000 with ten years of remaining protection might be amortized at $10,000 a year, usually on a straight-line basis.

The point is to match costs with the revenue they help produce. Spreading the expense gives a more accurate picture of profit in each year and of the asset's remaining value on the balance sheet. Intangibles with no fixed end date, such as goodwill under US accounting rules for public companies, are generally not amortized but tested each year for impairment instead.

Tax rules follow their own schedules. In the United States, Section 197 of the tax code generally requires certain acquired intangibles, including goodwill, to be amortized evenly over 15 years, and businesses can deduct a limited amount of startup and organizational costs in the first year and amortize the rest over 15 years. Rules differ by country and change over time, so confirm current treatment with a tax professional.

Frequently asked questions

Sources

• CFPB – What is amortization?
• IRS Publication 535 – Business Expenses (amortization)