Amortization explained in simple terms
You may have heard the term 'Amortization' or been asked to consider it, but what exactly does it mean? Essentially, Amortization is the process of spreading out the cost of an asset, such as a loan or an intangible asset, over a period of time. This is typically done through a series of equal payments, called amortization payments, which are made on a regular basis, such as monthly or annually. Each amortization payment consists of a portion of the principal amount of the loan or asset, plus interest. For example, if you take out a £100,000 loan with a 10% interest rate and a 10-year repayment period, your monthly amortization payment would be £1,073.64, which would consist of £869.62 in principal and £204.02 in interest. Over the course of the loan, you would make a total of 120 amortization payments, and you would pay a total of £128,437.68, which would include £100,000 in principal and £28,437.68 in interest. The advantage of amortization is that it allows the cost of an a...