Definition
Debt amortization is the scheduled repayment of principal over time, reducing the outstanding balance.
Formula
Ending balance = beginning balance - principal payments
Example
A $1M loan with $20k monthly principal payments amortizes by $240k in year one.
How to use it
- Amortization reduces interest expense over time as the balance falls.
- Model amortization explicitly in cash forecasts and covenants.
- Separate principal from interest to avoid overstating operating expense.
- Use an amortization schedule to forecast DSCR and covenant headroom.
Common mistakes
- Confusing amortization with interest-only periods.
- Ignoring prepayment penalties when accelerating principal.
- Mixing accounting amortization with actual cash repayments.
Measured as
Ending balance = beginning balance - principal payments
Misused when
- Confusing amortization with interest-only periods.
- Ignoring prepayment penalties when accelerating principal.
- Mixing accounting amortization with actual cash repayments.
Operator takeaway
- Amortization reduces interest expense over time as the balance falls.
- Model amortization explicitly in cash forecasts and covenants.
- Separate principal from interest to avoid overstating operating expense.
- Tie Debt Amortization to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Read Loan amortization: how monthly payments and total interest work if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
- Decide whether Debt Amortization belongs in cash planning, valuation, or debt monitoring so the number is used in the right model.
Where to use this on MetricKit
Guides
- Loan amortization: how monthly payments and total interest work: A practical guide to loan amortization: monthly payment formula, why interest dominates early, and how term and rate affect total interest.