Amortization is a financial term that describes the length and general repayment period of any type of loan. There are several different types that vary by industry, and each of them meets a specific need. Some of the more common applications are business amortization, amortization analysis, tax law, and zoning regulations.
Business amortization often has several variables when it comes to repayment times and interest rates. For example, a standard business loan may be at 1 percent interest for the first 36 months and then rise to 12 percent if it has not been paid in full. There could be three or even four different break points where the terms of the loan change. Many such loans are often drafted to encourage corporations to pay off the loan amount as quickly as possible, with increasing penalties if they do not. Negative amortization is a similar concept that has a set time period for repayment. If the loan is not paid in full by the agreed-upon date, the interest rate dramatically increases.
Amortization analysis is a formula used to determine the creditworthiness of an applicant before accepting the loan application. The mathematical equation determines the maximum amount of time that will be required for the loan to be paid in full to factor in a “worst case” type of scenario, and then the overall cost of lending those funds over that time period is calculated. If the financial institution can not charge in excess of the cost of the loan for whatever reason, then the application in denied.
Tax law computes how much interest will be collected over any given period of time in order to plan future budgets, which in essence, is preparing an amortization schedule on each and every taxpayer. These statistics often vary from the actual amounts collected since tax revenues can drastically change over a short period of time, but without this type of prediction, a state entity has no way to plan ahead. Of course, this is also why several state and local governments often have serious budget problems.
Zoning regulators also use a similar method to plot when contracts expire on city or state land. These schedules allow quick access to determine when certain plots will become available for rezoning or other official uses, and a copy is also given to the tenant. These types of schedules are also implemented when the government seizes property under eminent domain laws so that both parties know the maximum occupancy date.