The word amortization can be used in many contexts, from buying a home, to tax law, to selling a business, to computer science. For example, in the context of zoning regulations, the term amortization is used to describe the time period a property owner has to conform his non-compliant property to a new zoning classification before use of the property becomes prohibited. However, the same word used by computer scientists refers to how one would analyze algorithms over time.
When referring to buying or selling a business, amortization refers to paying off debt, in installments, through a fixed repayment schedule. Or, plainly stated, amortization is the process of paying off a loan over a period of time. For example, if you purchase a business for $1,000,000 and have a down payment of $500,000, if you take out a loan for the remaining $500,000, which you will repay monthly, plus interest, then you will be required to pay the interest on the loan plus a fixed amount of principal. If you are paying off this loan in equal installments over the life of the loan, then your debt is amortized. A majority of your monthly payment in the beginning of your loan goes to interest, with the remainder going towards the principal.
A majority of your monthly payment in the beginning of your loan goes to interest, with the remainder going towards the principal.
The farther along you are in paying off the debt, the more of the payment goes towards the principal. In our example above, your monthly payments for the $500,000 loan, if the debt is amortized over ten years, would be approximately $5,000 per month. Most of this would go towards interest in the beginning, but towards the end of the amortization period, most of the $5,000 is going towards principal, resulting in the debt being paid off in the planned time of ten years.