Maricor Bunal
You’re about to take a car loan and there’s much fuss about amortization, a term you haven’t encountered yet but seem to be very important for your next financial decision. So what is it really?
DEFINITION AND HOW IT WORKS
Amortization
Refers to the paying off of an asset over a specific period of time following a fixed payment schedule, which is agreed upon by the borrower and lender. The amortization amount is computed by adding up the actual loaned amount and the interest rate accumulated over a specific period of the time. So basically, amortization is roughly the value of the loaned money or asset and the revenue it generates. Those who are applying for or are currently having a car or home loan are most likely to encounter this term.
Amortization is also an accounting practice wherein a business expense is paid off in staggered amount per month so that the company’s balance sheet won’t have to show a one-time deficit in its balance sheet. In this way, the investment would have generated income first before it is being paid off.
DIFFERENCE BETWEEN AMORTIZATION AND DEPRECIATION
Many often confuse amortization and depreciation, considering that both concepts are closely related. But the main difference between the two is the fact that depreciation refers to the decrease in the value of an asset over time. On the other hand, amortization calculates only the value of the asset as you’ve bought it.
Cars, for instance, devalue over time along with the release of new units. That means, if you resell your car that has been around for at least 2 years, you can’t sell it at the same value as you’ve bought it. A real estate is a little different because it usually increases in value over time, especially those located in urban or suburban areas.
TIPS ON HOW TO SAVE ON AMORTIZATION COST
Keep the payment term short, but manageable
Opting for a shorter term means you can significantly reduce the interest rate, which also affects your loan’s overall cost.
Choose the right assets to buy
Buying assets that don’t depreciate easily is the key to making the most of your investment. For instance, if you’re still deciding which to buy first – real estate property (e.g., house, a piece of land) or a car – the former is the best choice. Besides, you can earn from your newly acquired land or house if you put it on the market for rent. The proceeds you can use for your car’s down payment.
Opt for high-revenue, long-lasting business investments
Putting money in income-generating assets never fails to help your business grow. Specifically, project launching and new equipment need your funding more than office decors and activities. In this way, the money you’ve probably borrowed will earn before being amortization date.
Whether you’re planning to get a home loan or car loan, amortization is a concept you should know, considering that it is part of the fine print of your agreement. For more guidance about amortization, feel free to contact our loan agents here at Loansolutions PH.
