Amortization is an accounting technique used to periodically lower the book value of a loan or intangible asset over a set period of time. The term amortization can refer to two situations. First, amortization is used in the process of paying off debt through regular principal and interest payments over time. An amortization schedule is used to reduce the current balance on a loan, for example a mortgage or car loan, through installment payments. Second, amortization can also refer to the spreading out of capital expenses related to intangible assets over a specific duration – usually over the asset’s useful life – for accounting and tax purposes.
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