5 Things you Need to Know About Amortization Featured
Amortization is defined as paying off a debt over time in equal installments.
Here are 5 issues you must know regarding Amortization:
1. Finance refers to Amortization as the loan repayment over time.
In accounting, it means expensing or writing off the cost of an intangible asset over time.
In personal finance, the amortization of a loan is always done through regular payments throughout the life of the loan.
In commercial finance, the payments can be regular or irregular, tailored to the cash flow patterns of the business.
2. Loans can be amortized or non-amortized.
With an amortizing loan, you pay the loan balance gradually over time.
With non-amortizing loans, you only pay interest throughout the loan term and repay the principal amount through a lump sum at the end.
3. Amortizing loans can be repaid through blended or Principal Plus Interest payments.
Blended payment arrangements establish equal monthly principal and interest payments over an agreed-upon amortization period.
Principal Plus Interest arrangements establish a monthly fixed principal payment and variable interest payments.
4. The accounting of loans amortizing through blended payments requires you to:
✅ split every blended payment and estimate the principal and interest amounts
✅ apply the principal payment to reduce the associated liability
✅ expense the interest cost.
Year-end adjustments are sometimes needed to bring the ending period loan balances in line with the lender statement.
5. There are several financial implications of loan amortizations:
✅ they reduce EBITDA and free cash flows available to service other debt, invest in business growth, or fund capital distributions to shareholders.
✅ they increase the risk of default of the business.
✅ they require careful cash flow planning to ensure adequate funding of payments.
✅ they need careful budgeting to ensure the business generates adequate profits to afford the payments.
We hope our blog post regarding Amortization is helpful. If it does, please share.
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Here are 5 issues you must know regarding Amortization:
1. Finance refers to Amortization as the loan repayment over time.
In accounting, it means expensing or writing off the cost of an intangible asset over time.
In personal finance, the amortization of a loan is always done through regular payments throughout the life of the loan.
In commercial finance, the payments can be regular or irregular, tailored to the cash flow patterns of the business.
2. Loans can be amortized or non-amortized.
With an amortizing loan, you pay the loan balance gradually over time.
With non-amortizing loans, you only pay interest throughout the loan term and repay the principal amount through a lump sum at the end.
3. Amortizing loans can be repaid through blended or Principal Plus Interest payments.
Blended payment arrangements establish equal monthly principal and interest payments over an agreed-upon amortization period.
Principal Plus Interest arrangements establish a monthly fixed principal payment and variable interest payments.
4. The accounting of loans amortizing through blended payments requires you to:
✅ split every blended payment and estimate the principal and interest amounts
✅ apply the principal payment to reduce the associated liability
✅ expense the interest cost.
Year-end adjustments are sometimes needed to bring the ending period loan balances in line with the lender statement.
5. There are several financial implications of loan amortizations:
✅ they reduce EBITDA and free cash flows available to service other debt, invest in business growth, or fund capital distributions to shareholders.
✅ they increase the risk of default of the business.
✅ they require careful cash flow planning to ensure adequate funding of payments.
✅ they need careful budgeting to ensure the business generates adequate profits to afford the payments.
We hope our blog post regarding Amortization is helpful. If it does, please share.
Important Links:
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