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Finance: What is Amortization? 49 Views
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Description:
What is amortization? Amortization tracks the decline in value of a contract or service, usually paid for in advance. You received $10,000 in advance to water Ms. Maple's lawn for 10 months. She amortizes your watering to the tune of a decline in value of that contract of $1,000 as each month goes by.
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Transcript
- 00:00
Finance a la shmoop what is amortization alright come on now people
- 00:07
sing it with me when you repay your loan overtime on your own that's amortization [man singing serving food and dogs jump up]
- 00:14
doesn't everyone know that song i was raised as a kid with that at bedtime
- 00:18
all right well sorry about that every now and then Beyonce being Crosby has to [Beyonce on stage]
- 00:22
you know let out her inner self here so yeah amortization big word let's make it
Full Transcript
- 00:27
smaller we've got the root word Mort in there which means death and yeah [Mort highlighted in yellow]
- 00:33
basically when you're amortizing alone you're killing your obligation to pay it [a knife pulled on the loan]
- 00:37
and softly, killing softly with his song and yes another way you're gradually reducing
- 00:44
your obligation by paying back the loan you know whatever you borrowed your
- 00:47
amortizing all right so once a loan is fully amortized the amount you owe is [loan bill due amount]
- 00:54
zero like you paid it all back all right well that's one definition of the term
- 00:58
amortization also refers to a fancy way of allocating costs like you pay a
- 01:06
thousand dollars for an amazing bed mattress well did you get value from it [man paying $1000 for a bed and hands cash to woman]
- 01:11
well if you use it a lot you'll amortize the cost in such a way that the bed on a
- 01:17
per night basis is cheap how so well if you sleep on it for 2,000 nights before [calculation for value of bed]
- 01:24
you toss it some dumpster somewhere you paid 50 cents per night for your bed got
- 01:30
it fifty cents times two thousand that's a grand and that's like a nickel of hour of
- 01:34
use if you're know sleeping 10 hours a day or using it ten hours a day and [man sleeping in vibrating bed]
- 01:38
that assumes it's just you in the bed all right well what about a prom dress
- 01:41
or a tux well the finest Walmart prom dress runs [girl holding a prom dress for $300]
- 01:45
about 300 dollars but you wear it once before Tyler Hendricks vomits on it and [Tyler vomits on girls prom dress]
- 01:50
well and you're done so it cost 300 bucks for one night or
- 01:56
about fifty bucks an hour for the six hours you wore it before tossing it yeah
- 02:02
way expensive per use because you only had six hours of amortization the dress [calculation for the value of prom dress]
- 02:08
well loans work the same way you borrow 120 grand to buy a home with a 30-year
- 02:12
mortgage over those 30 years you amortize the loan or allocate the paying [woman receiving a 30-year loan for a mortgage]
- 02:17
down of that 120 k you just borrowed over a long period of time so you know
- 02:24
something keep in mind the next time you go shopping for a bed or a dress [a couple shopping for a bed]
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