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amortization

Contributor(s): Ivy Wigmore

Amortization is a financial practice that allows buyers to pay for something over an extended schedule rather than all at once. Mortgages and car loans, for example, are commonly paid through an amortization schedule.

An amortization schedule typically involves regular payments over a particular time period. Essentially an extension of credit, amortization allows people and businesses to make purchases that they don't have funds available to pay in full. Because interest is factored into payments, the total cost of an amortized purchase is significantly higher than the original price. 

In business, amortization is usually separated into amortization of assets and amortization of loans because those categories are handled differently. Amortization is often the most cost-effective method of allocating funds for a given expense, even if the funds are available for immediate payment, because there may be a more profitable use of those funds. Similarly, a business may take out a loan rather than paying for something outright because there is a financial advantage, such as optimizing a tax deduction over an extended period.

In financial reporting and corporate governance, amortization is the A in EBITDA (earnings before interest, taxation, depreciation and amortization).

Amortization originates from the Latin admortire meaning to kill.

This was last updated in February 2018

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