Amortization
The process of gradually paying off a debt through regular payments, or writing off an intangible asset's cost over time.
What is Amortization?
Amortization has two meanings in finance: (1) In lending, amortization is the process of repaying a loan through scheduled periodic payments that cover both principal and interest over the loan's life, such that the balance reaches zero at maturity. Early payments are weighted toward interest; later payments toward principal. (2) In accounting, amortization is the systematic write-off of an intangible asset's cost over its useful life — analogous to depreciation for tangible assets. Intangible assets subject to amortization include patents, trademarks, copyrights, and acquired customer lists. Both uses involve spreading a cost or obligation over time through regular, predictable charges.
Example
Loan amortization: a $200,000 15-year mortgage at 6% has equal monthly payments of $1,688. Payment 1: $1,000 interest + $688 principal. By payment 180, nearly all of the $1,688 is principal. Accounting amortization: a company pays $5 million for a patent with a 10-year legal life, recording $500,000 annual amortization expense that reduces the patent's book value each year.