The advantages and disadvantages of amortization inform you whether you should consider or avoid it if you have a loan still under repayment.
Advantages of Amortization
1. Tax reduction
One of the main advantages of amortization is reducing the tax burden. It means that if one uses the said asset, it can directly reduce your taxes.
2. More income and assets on the balance sheet
In addition to reducing your tax burden, you will have the opportunity to own more assets, such as trademarks and copyrights that can be highly valued.
3. Easier to evaluate loan options
With the different types and examples of amortization loans available, it is easier for an individual to evaluate the loan he would like. In the amortization schedule, one can evaluate the amounts required to pay with different interest rates and choose the best loan suited for him.
4. Fixed loan payments
Fixed loans with fixed interest rates create a fixed amortization schedule. It makes it easier for the person taking the loan to understand the amount he must pay and the reason. It also allows them to plan out other payments and track how they have been paying over some time.
5. Adjustable timeframe
This means that if one decides to pay the loan in a shorter period than specified, he can pay more money than stated in monthly installments. It will ensure that the loan is paid in a shorter time, saving them a lot of money and energy.
Disadvantages of Amortization
1. It is challenging to determine the actual costs of intangible assets
Because the assets in question are intangible, it is challenging to evaluate their value correctly.
2. Increasing monthly payments
With the negative amortization, the principal increases with time which can be a massive challenge for the person paying off the loan.