Amortization vs. Depreciation

Amortization vs. Depreciation

Amortization and depreciation both financial approaches that deal with the reduction of expenses over time. Both words have complex definitions and applications that are used in the financial sector as well as more simplified, common meanings that are used by laymen.

Amortization is the systematic repayment of debt in small portions over a long period of time. Many mortgages, for example, are amortized over a period of 30 years. Amortization tables can show the amount of payment at a certain interest rate over a period of time. Generally, earlier payments primarily cover interest while later payments reduce the principal amount.

Depreciation is the decrease in value over time of an asset. For example, Grandma's car is worth $5000, but if it sits untouched in the garage for ten years, depreciation will bring the value down. Depreciation of an asset can be predicted based on its useful life. Therefore, businesses can claim yearly depreciation as a tax deduction.

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