Amortization Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Amortization, written in plain English, along with examples of how it is used.

What is Amortization?

n. a division of the content of books. for exmaple, legal agreemnts or constitution or deeds, etc. are regrouped into smaller sections for the sake of perspicuity.

History and Meaning of Amortization

The term "amortization" comes from the Latin word "amortire," meaning "to kill off." In the context of finance, amortization refers to the process of paying off a debt over time through regular payments that include both principal and interest. The goal of amortization is to fully pay off the debt by the end of the payment period.

Amortization is commonly used in the context of mortgages, where borrowers make regular payments over a set period of time, typically 15 or 30 years, to pay off the loan in full. Each payment is made up of both principal, or the amount borrowed, and interest, which is the cost of borrowing the money.

Examples of Amortization

  1. Sarah took out a $200,000 mortgage with a 30-year term and an interest rate of 4%. Her monthly payment includes both principal and interest, with a larger portion going towards interest at the start of the loan. Over time, as Sarah makes regular payments, more and more of her payment will go towards paying down the principal.

  2. John purchased a new car with a $20,000 loan at an interest rate of 3%. He will make monthly payments over the next 5 years, with each payment including both principal and interest. By the end of the loan term, John will have fully paid off the debt.

  3. ABC Corporation took out a loan of $500,000 to purchase new equipment for their manufacturing plant. The loan has a 10-year term with an interest rate of 6%. ABC will make regular payments over the course of the loan term, with the goal of fully paying off the debt and owning the equipment outright.

Legal Terms Similar to Amortization

  1. Depreciation - The process of allocating the cost of an asset over its useful life.

  2. Capitalization - The process of adding a cost to an asset on a company's balance sheet rather than immediately expensing it.

  3. Accrual - The recognition of revenue or expenses when they are earned or incurred, rather than when they are received or paid.