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An amortization period is one of two things: either the length of time between when a loan is initiated and when it is paid off, or the length of time between when an intangible asset is established and when it reaches a zero or negligible value. The first sort of amortization period is most common in long-term loans, particularly mortgages and student loans. It is essentially the figure that represents the life of the loan. Where intangible assets are concerned, an amortization period is most commonly used in accounting and tax preparation to indicate a declining value over time. This is very similar to depreciation for fixed assets and capital.
Most loans come with a fixed amortization period. This is usually different than the loan term. In mortgages and student loans, the initial loan period can be renegotiated, often at set intervals. Most of this has to do with interest rates, which fluctuate. The amortization period, on the other hand, is little more than the total span of time from the moment the money is initially lent until the day it is returned and all interest repaid.
In general, longer loan amortization periods lead to lower monthly payments, but a larger total payment amount. A shorter period requires more to be paid each month, but often works out to be more financially beneficial for borrowers. Almost all of this relates to interest.
Loan interest is usually assessed as a percentage of the outstanding “principle,” or unpaid amount. The longer a borrower takes to pay down the principle, the more interest payments he or she will accrue, which generally leads to a more substantial financial obligation. Borrowers can often save money and shorten the amortization schedule by paying more than is due in each payment period. Not all loans allow for accelerated payments, but many do.
Accounting takes a related, but slightly different, view of amortization periods when it comes to intangible assets. Amortization in this context is a lot like depreciation. When a company buys something substantial, like a building, or a person purchases a home, financial advisers often recommend that these assets be depreciated, such that their purchase price is spread out over the lifespan of their value. Most of the time, this is for tax and other accounting purposes. When applied to intangible assets, this same theory and process is called amortization.
Companies and individuals often invest substantial funds into things like trademarks, copyrights, or patents that are not fixed, but are nevertheless very valuable. Even something like corporate or brand-related good will can be considered an intangible asset if documented resources have been poured into developing it. Accountants often calculate the amortization period for these assets such that only a piece of their value is imputed to the corporation or owning entity each year. Amortization tools like value rubrics, statistical calculators, and market indicators are often required.
The amortization period is usually fixed to include all years in which the asset is projected to have some value, though that value generally lessens with the passage of time. Under such a scheme, a corporation will only be responsible for the value of the asset within a given period. Amortization techniques are not only helpful at tax time, but can also be used as a strategy for manipulating period gains and losses.