Amortization is an accounting term used for two separate processes: Amortization of Loan and Amortization of Asset.
Amortization of Loan is the process of spreading out a loan into a series of fixed payments over a period of time, such as monthly loan payments. An individual will be pay off the loan’s interest and principal in different amounts each month, although the total payment remains equal each period.
Amortization of Asset, on the other hand, refers to the process of allocating the cost of intangible assets over a period of time. It reflects the consumption of an intangible asset over its useful life. These intangible assets could include: Patents, trademarks, copyrights, organizational cost, etc. Amortization is generally encountered by people while dealing with mortgages or car loans.Explore Definition
A number of types of loans are available and any loan on installment is amortized. Hence, there are the following types of amortizing loans:
- Personal loans: The loan one gets from a bank, credit union or online lender; they mostly have three-year terms, fixed interest rates and fixed monthly payments.
- Home loans: Home loans are generally 15-year or 30-year fixed rate mortgages.
- Auto loans: Often, auto loans are five-year or shorter amortized that one pays in a fixed monthly payment.
In Canada, the terms amortization and depreciation are often used interchangeably to refer to both tangible and intangible assets. Difference between depreciation and amortization is that amortization is associated with charging intangible assets to expense over time, and depreciation is associated with charging tangible assets to expense over time.