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Amortization
Also called amortization, amortization schedule.
Repaying a loan through scheduled payments that cover interest on the outstanding balance and reduce principal, so the debt reaches zero at the end of the term.
Drafted with AI assistance and checked by a person. Its factual claims were verified against the sources listed at the end, by Find Me Funders research desk.
What it means
In a level-payment loan, each installment is the same but its composition changes. Early payments are mostly interest, because interest is charged on a large outstanding balance; late payments are mostly principal. The schedule that sets this out payment by payment is the amortization schedule, and it is the document that tells you what a payoff on any given date actually costs.
Three variations matter in small-business finance. Fully amortizing means the schedule retires the debt entirely by maturity. Partially amortizing means payments are set on a longer schedule than the actual term, leaving a balloon at the end. Interest-only means no principal reduction at all during the period, so the balance at the end is the balance at the start.
Amortization period and term are separate numbers. A commercial mortgage might amortize over 25 years but mature in 5. SBA 7(a) working capital and equipment loans commonly amortize over the full term with no balloon, which is a genuine structural advantage over conventional commercial paper.
Cash advances and factor-rate products do not amortize. There is no principal balance being reduced and no interest accruing on a shrinking sum. There is a fixed total to be delivered, which is why an amortization schedule cannot be produced for one and why early repayment does not reduce the cost.
Where this one catches people
Asking for a payoff figure part-way through an amortizing loan gets you the remaining principal plus accrued interest, which is much less than the sum of remaining payments. Asking for a payoff on a factor-rate advance usually gets you the remaining purchased amount, which is the sum of the remaining payments. Same question, structurally different answers, and it is the difference that catches people out when consolidating.
Worked through
100,000 at 12 percent nominal over 5 years pays about 2,224 a month. In month one, interest is 100,000 x 12 percent / 12 = 1,000, so 1,224 reduces principal. In month 50, interest is about 231 and nearly the whole payment — about 1,994 — is principal. The sum of remaining payments always exceeds the payoff balance.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Sources and checks
Every figure on this page traces to a document someone read, on a date. Where a check is past its review date it says so rather than passing as current.
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a 100,000 loan at 12% nominal over 60 months pays 2,224.44 a month, with 1,000 of interest and 1,224.44 of principal in month one
examplei = 0.12/12 = 0.01, n = 60. PMT = 100,000 x 0.01 / (1 - 1.01^-60) = 2,224.44. Month 1 interest = 100,000 x 0.01 = 1,000.00; principal = 2,224.44 - 1,000.00 = 1,224.44.
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CORRECTED: month 50 interest on that schedule is 230.62, not 'under 200'
exampleAmortizing at i = 0.01, the opening balance for month 50 is 23,062.22, so month 50 interest = 23,062.22 x 0.01 = 230.62 and principal = 1,993.82. Interest first falls below 200 in month 52 (190.55). The entry understated month-50 interest by about 15%.
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SBA 7(a) maturities are set to the shortest appropriate term, ten years or less unless real estate or equipment with a useful life over ten years is financed, to a maximum of 25 years
definition13 CFR 120.212: 'The term of a loan shall be: (a) The shortest appropriate term, depending upon the Borrower's ability to repay; (b) Ten years or less, unless it finances or refinances real estate or equipment with a useful life exceeding ten years' and (c) a maximum of 25 years including extensions. Supports the entry's amortization-period-versus-term point; the 'no balloon' statement is hedged as 'commonly' and rests on SBA SOP 50 10 rather than the CFR.
Amortization — common questions
What does amortization mean?
Repaying a loan through scheduled payments that cover interest on the outstanding balance and reduce principal, so the debt reaches zero at the end of the term.
Where does amortization catch people out?
Asking for a payoff figure part-way through an amortizing loan gets you the remaining principal plus accrued interest, which is much less than the sum of remaining payments. Asking for a payoff on a factor-rate advance usually gets you the remaining purchased amount, which is the sum of the remaining payments. Same question, structurally different answers, and it is the difference that catches people out when consolidating.
Is amortization the same as an interest rate?
Amortization is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does amortization apply to?
Working Capital, Term Loan, SBA Loan, Equipment Financing.
Is there a worked example of amortization?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside amortization?
Add-on interest, Annual percentage rate, Balloon payment, Factor rate, Interest-only.
Has this definition been checked?
Yes. Its claims were verified against the sources listed at the end of this page, and the reviewer is named.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.