Understanding amortization is like learning how to spread a big payment into small, manageable bites. Whether it’s for a loan or an intangible asset like a patent, amortization helps you break down costs systematically. For borrowers, it means predictable EMIs; for businesses, it ensures accurate expense reporting. Let’s explore what amortization is, how it works, and why it matters for your financial planning.
How to calculate loan amortization
Loan amortization tells you how much of your EMI goes toward interest and how much reduces the loan principal. The formula is:
M = P × [r (1 + r)ⁿ] / [(1 + r)ⁿ – 1] |
Where:
M = Monthly EMI
P = Loan amount
r = Monthly interest rate (annual rate ÷ 12)
n = Number of months in the tenure
For example, on a home loan of Rs. 10,00,000 at 6% annual interest for 20 years, the EMI can be calculated using this formula. The result shows how your repayment schedule is structured into interest and principal components.
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Importance of amortization
Amortization is more than just accounting—it is a financial planning tool.
Predictable repayment structure: Helps borrowers plan monthly budgets with clarity.
Interest expense management: Shows how extra payments toward principal can cut interest costs.
Accurate reporting: Businesses expense intangible assets over time, aligning costs with revenue.
Tax benefits: Intangible asset amortization is often tax-deductible.
Asset valuation: Reflects the true worth of intangible assets like patents or trademarks.
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