Amortization Calculator
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Loan Details
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Amortization Schedule
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| Month | Interest | Principal | Ending Balance |
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What is Amortization?
There are two general definitions of amortization. The first is the systematic repayment of a loan over time. The second is used in the context of business accounting and is the act of spreading the cost of an expensive and long-lived item over many periods.
Paying Off a Loan
When a borrower takes out a mortgage, car loan, or personal loan, they usually make monthly payments to the lender. A part of the payment covers the interest due on the loan, and the remainder goes toward reducing the principal amount owed.
Amortization Schedule
An amortization schedule (sometimes called an amortization table) details each periodic payment on an amortizing loan. It helps indicate the specific amount paid towards interest vs principal, along with the remaining principal balance.
Spreading Costs
From an accounting perspective, a sudden purchase of an expensive factory can skew the financials, so its value is amortized over the expected life of the factory instead (depreciation expense).
Intangible Assets
Amortization in accounting often refers to intangible assets like a patent, goodwill, or copyright. Under U.S. tax law, the value of these assets can be deducted month-to-month or year-to-year.
Loans that do not amortize
Not all debt follows an amortization schedule. Credit cards are an example of revolving debt, where the outstanding balance can be carried month-to-month and minimum payments fluctuate. Examples of other non-amortized loans include:
- Interest-only loans: The borrower pays only the interest for a certain period before either paying off the principal as a lump sum or moving into a rigid amortization schedule.
- Balloon loans: Similar to interest-only structures, but usually requires a massive standard payment at loan maturity that must be refinanced or paid entirely in cash.
Related Tools
Amortizing Startup Costs
In the U.S., business startup costs, defined as costs incurred to investigate the potential of creating or acquiring an active business, can only be amortized under certain conditions. They must be expenses that are deducted as business expenses if incurred by an existing active business and must be incurred before the active business begins. According to IRS guidelines, these initial startup costs must go through formal amortization.
Key Takeaways
- Understand Total Cost: Your interest is weighted heavily toward the beginning of the loan, making early extra payments more effective.
- Track Equity Growth: Amortization schedules show you exactly when you will reach milestones like 20% equity or full ownership.
- Payment Breakdown: Each monthly payment is split between interest and principal, with the principal portion increasing over time.
- Impact of Rate: Even small reductions in your interest rate can save tens of thousands of dollars over the life of a long-term loan.