Finance: What is Amortization?

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

00:27

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]