Quick answer
Amortisation means spreading something out over time. In lending, it's the gradual repayment of a loan's principal through regular instalments until the balance reaches zero. In accounting, it's the yearly write-down of an intangible asset such as goodwill, software or a licence. Lenders care about both: the first shapes your repayments, the second is a non-cash expense they usually add back to profit.
Key points
- A fully amortising loan reaches a zero balance on its final scheduled repayment
- Early repayments are mostly interest; later ones are mostly principal
- Interest-only periods and balloon payments mean a loan is only partly amortised
- Accounting amortisation is a non-cash expense that lenders normally add back
Two people can use the word amortisation in the same meeting and mean different things. Your lender is usually talking about how a loan gets paid off. Your accountant may be talking about how the goodwill you paid for a business is written down in the accounts. Both are about spreading a cost over time, and both end up in a loan application.
Meaning one: paying a loan down to nothing
A fully amortising loan is set up so that equal regular repayments clear both the interest and the principal by the final instalment. Most business term loans and equipment finance without a balloon work this way.
The mix inside each repayment changes as you go. Interest accrues on whatever principal is outstanding, so in the early months, when the balance is highest, more of each payment is interest. As the balance falls, the interest portion shrinks and more of the same payment goes to principal. The repayment stays the same; what it buys changes.
This is why paying out a five-year loan in year two often saves less than people expect, and why break costs or early payout fees deserve a look before you refinance.
Not every loan amortises fully
| Structure | What happens to the balance | Where you’ll see it |
|---|---|---|
| Fully amortising | Falls to zero by the last payment | Most term loans, many equipment loans |
| Partly amortising | Shrinks, leaving a final lump sum | Loans with a balloon payment |
| Interest-only | Stays the same for the interest-only period | Some property-secured and commercial loans |
| Negatively amortising | Grows over time | Loans with capitalised interest |
Each structure has its place. A balloon keeps truck repayments in line with what the truck earns; interest-only can carry a property developer to settlement. Trouble starts when nobody has worked out where the final lump will come from.
Worked example: $120k of equipment over four years
A Toowoomba earthmoving contractor finances a $120k excavator over four years with no balloon. The balance at the end of each year might look roughly like this:
| End of year | Balance owing | Paid off that year |
|---|---|---|
| 1 | $93k | $27k |
| 2 | $64k | $29k |
| 3 | $33k | $31k |
| 4 | $0 | $33k |
The yearly repayments are identical, yet the principal cleared climbs every year. Add a $30k balloon and each repayment drops, but $30k is still owing at the end of year four. Try both versions in our business loan repayment calculator and compare the total dollars repaid, not just the monthly figure.
Not sure which repayment shape suits your cash flow? Describe the purchase to us and we’ll map out the options.
Meaning two: writing down intangible assets
When a business buys something it can’t touch, such as goodwill on an acquisition, a franchise right, a patent or a software licence, the cost can be spread across the asset’s useful life in the accounts. That yearly charge is amortisation. It’s the intangible cousin of depreciation.
Because no money leaves the bank account when amortisation is recorded, lenders assessing serviceability generally add it back to profit. It’s the “A” in EBITDA. If you’ve bought a business and your profit looks thin because of goodwill amortisation, make sure your accountant’s add-back schedule shows it clearly.
Related terms
- Principal and interest: the repayment type that amortises a loan
- Repayment schedule: the document that shows the amortisation in detail
- Add-backs: where accounting amortisation reappears in a lender’s maths
Matching the payoff curve to your income
Which amortisation profile works best hinges on the purpose of the funds and the timing of the cash they generate. Equipment that earns steadily suits a loan that pays down evenly; a property sale in six months suits something that doesn’t. Want an independent view on how a facility should be shaped? Our short form is the starting point. Allow roughly sixty seconds; submitting it doesn’t put an enquiry on your credit file, and we don’t shop your details around the market. A real person studies your purpose and timeline, then phones to discuss it. Accurate figures on the form mean the structure we suggest first is one that actually fits.
Frequently asked questions
What is an amortisation schedule?
A table showing every repayment over the life of a loan, split into interest and principal, with the balance remaining after each payment. Ask your lender for one before signing; it's the clearest way to see how quickly you're building equity.
Is amortisation the same as depreciation?
In accounting they're the same idea applied to different things. Depreciation spreads the cost of physical assets like vehicles and machinery. Amortisation does the same for intangible assets like goodwill, patents and purchased software.
What does a negatively amortising loan mean?
One where the balance grows instead of shrinking, because the repayments don't cover all the interest or interest is added to the loan. Capitalised interest on some construction and bridging loans works this way until the loan is repaid in one hit.
Do short-term business loans amortise?
Most unsecured term loans from online lenders are fully amortising, with daily, weekly or fortnightly repayments. Many caveat and bridging loans are not: interest is prepaid or capitalised and the principal is repaid in full at the end.
Why does the amortisation period matter if my repayments are affordable?
A longer period lowers each repayment but means paying interest for longer, so the total cost in dollars rises. It can also leave you owing more than an asset is worth if the asset wears out before the loan is cleared.