The main difference of amortization vs depreciation is that amortization is used to value and charge the cost of an intangible asset over its usage time. On the other hand, depreciation is used to charge the cost of a tangible asset’s wear and tear over its usage period.
Types of Amortization
1. Full amortization with a fixed rate
A fully amortized loan is a kind of loan with a fixed interest rate, and a fixed amount of payment is made monthly throughout the loan payment. The final payment may be higher or lower depending on the remainder of the loan balance.
2. Full amortization with a variable rate
This is a kind of amortized loan where the interest rate varies. The interest rate changes after some time, and a new amortization schedule is made every time it changes. That loan period is fixed; however, you may pay higher or lower payments.
3. Full amortization with deferred interest
This is a kind of amortized loan where an individual can pay only interest for a specific period. After the period, they can pay off the interest plus the principal.
4. Partial interest with a balloon payment
It’s a type of amortization where the payment of a large proportion of the loan is paid at the end of the loan schedule. It can make the monthly payments lower for a short period. However, when considering this kind of payment, it’s essential to be sure if you’ll be able to pay a large sum of payment at the end of the loan period.
5. Negative amortization
In a normal amortization, the principle and interest decrease over time as one keeps paying off. In negative amortization, however, the opposite happens. The principal increases over time, even after making regular payments.
It happens when you can pay only a certain fixed amount of interest per month. The rest of the unpaid interest is then added to the principle. This whole process is known as interest capitalization.