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Amortization Meaning: Definition, Examples, and Translations

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amortization

[ˌæmɔːrtɪˈzeɪʃən ]

Definition

Context #1 | Noun

finance term

Amortization refers to the process of gradually reducing a debt or the cost of an intangible asset through regular payments over a set period. In financial terms, this typically involves paying off a loan in scheduled installments that cover both the principal and interest. It helps businesses and consumers manage their debts effectively and allows for the smooth budgeting of future cash flows.

Synonyms

depreciation, liquidation, payoff.

Examples of usage

  • The bank offers an amortization schedule for the loan.
  • His mortgage has a 30-year amortization period.
  • Understanding amortization is crucial for effective financial planning.

Translations

To see the translation, please select a language from the options available.

Interesting Facts

Finance

  • Amortization is commonly used in home mortgages, where monthly payments gradually reduce both principal and interest.
  • There are different amortization schedules, including fixed and adjustable rates, which impact how much of your payment goes to interest and principal each month.
  • Amortization helps borrowers understand their debt repayment over time, improving financial planning.

Legal

  • Many legal documents related to loans include amortization tables, showing repayment schedules to protect both lender and borrower rights.
  • Bankruptcies can involve amortization adjustments, allowing individuals to restructure their debts over time.

Economic Impact

  • In economics, amortization affects corporate accounting practices, influencing how businesses report and manage assets.
  • Governments may use amortization schedules for public projects, planning how to fund infrastructure over time.

Everyday Life

  • Understanding amortization can help individuals choose the right loan, as different terms can save or cost them thousands over time.
  • Many personal finance apps now help users visualize amortization schedules to enhance budgeting decisions.

Origin of 'amortization'

Main points about word origin

  • The word comes from the Latin 'amortizare', meaning 'to kill off' or 'to extinguish', reflecting how debt disappears over time.
  • The prefix 'a-' means 'to' or 'toward', while 'mort' is related to death, showing the idea of eliminating a financial obligation.

The term 'amortization' originates from the late Latin word 'ammortire,' which means 'to kill off.' This reflects the idea of gradually eliminating a debt or liability by breaking it down into smaller, manageable parts. The concept of amortization has roots in the financial practices that emerged during the medieval period, where various methods of debt management and repayments were developed. Over time, it has become a standard term in modern finance and accounting, applied to loans, mortgages, and intangible assets such as patents and copyrights. The practice of amortization allows businesses and individuals to plan their finances more effectively by spreading out the cost of an asset or liability over its useful life.

Word Frequency Rank

Ranked #11,761, this word falls into high-advanced vocabulary. It appears less frequently but is valuable for expressing precise meanings in specific contexts.