What is the difference between amortisation and depreciation?

Depreciation spreads the cost of a physical asset over its useful life, and amortisation in the accounts does the same for an intangible asset. Both are non-cash charges in the profit and loss account. Amortisation of a loan is a different thing: the cash repayment of principal on a schedule, which does not pass through the profit and loss account. A business can record large depreciation while repaying little principal, or the reverse, and the two schedules need not agree.

Why do early loan repayments carry more interest than later ones?

Because interest is charged on the balance, and the balance is highest at the start. On a level instalment the payment is fixed, so a large interest charge leaves less for principal in the early months. As the balance falls, interest takes a smaller slice and principal a larger one. On a US$1.2m five-year loan at 8%, the first monthly payment of US$24,332 includes US$8,000 of interest; the last includes US$161. Over thirty years at the same rate, about 91% of the first payment would be interest.

Is a level instalment or an equal-principal repayment better?

Neither is better in general. Equal principal costs less interest in total because the balance falls faster at the start, but the opening payments are higher. In the example on this page the first year costs about US$35,000 more and the whole loan about US$16,000 less. A level instalment is easier to budget. A lender looks at whether the first year's payment fits the cash the business can spare, which is where an equal-principal schedule is tightest.

Can a business repay a term loan faster than the schedule?

Usually, on terms the facility agreement sets. Floating-rate loans can often be prepaid on an interest date at little cost, while a fixed-rate loan may carry a break cost if market rates have fallen, and some loans carry a prepayment fee. The agreement also says whether an extra payment shortens the loan or reduces later instalments, which changes the cash the business has to find next year. It is worth reading that clause before making the payment.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Amortisation: a Worked Example

Every instalment buys down the debt, and the interest with it.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

When a lender writes an amortisation schedule into a term loan, it decides how fast the debt must come back out of the business's own cash, and how much will still be owed once the thing it paid for has aged. Each instalment splits in two: interest on the balance, then the rest off the principal. On a five-year US$1.2m loan at 8%, the borrower pays about US$260,000 of interest, against US$480,000 if no principal is repaid before the end. The price of that saving is an annual payment three times as large.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 11 — The Term Sheet War. A nine-year client brings a competitor's term sheet: 40 basis points inside your pricing, covenant-lite, and a Friday deadline. Your call first, then the senior banker's.

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PART OF Corporate Lending and Credit Risk

// 01 — WHY A LENDER WRITES A SCHEDULE

A loan with no repayments rests on one event. On the day it falls due the borrower must find the whole sum, usually from another lender. Amortisation replaces that event with many small ones. Each instalment is a test of whether the business can produce cash after its other commitments, and a missed one tells the lender something is wrong years before a maturity date would. The schedule also keeps the loan shrinking while the asset behind it wears out, so the lender is not left with a large balance against an old machine.

The word has a second meaning that causes confusion. The A in EBITDA is an accounting charge that spreads the cost of an intangible asset over its life. It uses no cash and passes through the profit and loss account. Loan amortisation is the reverse: it is cash, and the principal repaid does not touch the profit and loss account at all. Only the interest does. That is how a profitable company can run short of the money for its instalments.

// 02 — HOW THE SCHEDULE IS BUILT

Level instalment = P × r ÷ (1 − (1 + r)^−n)

P loan, r rate per period, n payments

Interest = opening balance × r

Principal = instalment − interest

Closing balance = opening balance − principal

Two full schedules are common. A level instalment holds the payment constant while its mix moves from interest toward principal; New Zealand lenders commonly call this a table loan. An equal-principal schedule, which some New Zealand lenders call a reducing loan, repays the same principal each period and adds interest on what remains, so payments start higher and fall. Other structures repay less than the whole: an interest-only period delays the start, a balloon leaves a lump at the end, and a bullet repays nothing until maturity. The schedule and the maturity need not match. A loan can be scheduled as if it ran fifteen years and fall due in five, with the balance repayable then, and an institutional term loan B often repays only a small share each year.

// 03 — THE EXAMPLE

A maker of stone kitchen benchtops, constructed for this page like every figure in it, buys a cutting line for US$1.5m and borrows US$1.2m over five years at a fixed 8%, repaid monthly. The rate, term and loan share belong to the example and are not offered as a market norm.

Instalment: 1,200,000 × 0.006667 ÷ (1 − 1.006667^−60) = 24,332 a month

Month 1: interest 8,000 principal 16,332 balance 1,183,668

Month 60: interest 161 principal 24,171 balance 0

US$ First-year payments Total interest

Level instalment 291,980 259,900

Equal principal 327,200 244,000

30% balloon at the end 233,186 325,930

Interest-only, repaid at end 96,000 480,000

The level schedule costs 54% of the interest-only loan's interest, because the balance averages about US$650,000 rather than US$1.2m. It also asks for three times the annual cash. The benchtop maker has US$400,000 a year available for debt service:

Level instalment: 400,000 ÷ 291,980 = 1.37×

Interest-only: 400,000 ÷ 96,000 = 4.17×

End of year 0 1 2 3 4 5

Loan balance, US$000 1,200 997 776 538 280 0

Forced-sale value 900 760 640 530 430 350

The 4.17 looks better and says less, since after five years of it the whole US$1.2m is still owed. The second table is what the schedule buys. For about three years the balance exceeds what the line would fetch in a forced sale, and the lender is relying on cash flow. From year four the machine alone covers the loan. Those values are the example's own estimates.

// 04 — WHAT A LENDER READS BESIDE IT

The schedule writes half of the ratio a lender tests first. Debt service cover divides the cash available by interest and scheduled principal, so a faster schedule lowers the ratio with nothing changed in the business. Accounts show the same schedule from another side: the principal due within twelve months generally sits in current liabilities, under IFRS-based standards and FRS 102 alike. At the end of year one that is about US$220,000 of the US$997,000 balance, and it comes straight out of the working capital a reader sees.

A balloon differs in who carries the last part of the risk. Amortisation repays the loan from the business's own cash. A balloon assumes that someone, at maturity, will refinance or buy the asset. A cash sweep is different again: it adds repayments in good years on top of the schedule, and the amount depends on what the business earned.

DEFINED IN ONE PARAGRAPH → · THE TERM LOAN FILE → · BALLOON PAYMENT →

// 05 — WHERE IT DECIDES A FILE

The argument usually starts with the instalment. A borrower short of cover asks for a longer schedule, and the arithmetic obliges. Stretched from five years to seven, the benchtop maker's payment falls to about US$224,400 a year and cover rises to 1.78 times. Total interest rises to about US$371,000. At the end of year five the balance would still be about US$414,000, against a forced-sale value of US$350,000, on a machine five years old. The ratio has improved by moving risk into the years when the asset is worth least, and the lender's question is whether the line will still be earning then.

The schedule also reappears when a business struggles. A request to suspend principal for a season lifts the cover ratio at once and stops the exposure falling. A lender reads it as a concession to be sized, time-limited and recorded, with a plan for how the skipped principal is caught up, because a pause granted once can be asked for again.

// QUESTIONS PEOPLE ASK

What is the difference between amortisation and depreciation?: Depreciation spreads the cost of a physical asset over its useful life, and amortisation in the accounts does the same for an intangible asset. Both are non-cash charges in the profit and loss account. Amortisation of a loan is a different thing: the cash repayment of principal on a schedule, which does not pass through the profit and loss account. A business can record large depreciation while repaying little principal, or the reverse, and the two schedules need not agree.
Why do early loan repayments carry more interest than later ones?: Because interest is charged on the balance, and the balance is highest at the start. On a level instalment the payment is fixed, so a large interest charge leaves less for principal in the early months. As the balance falls, interest takes a smaller slice and principal a larger one. On a US$1.2m five-year loan at 8%, the first monthly payment of US$24,332 includes US$8,000 of interest; the last includes US$161. Over thirty years at the same rate, about 91% of the first payment would be interest.
Is a level instalment or an equal-principal repayment better?: Neither is better in general. Equal principal costs less interest in total because the balance falls faster at the start, but the opening payments are higher. In the example on this page the first year costs about US$35,000 more and the whole loan about US$16,000 less. A level instalment is easier to budget. A lender looks at whether the first year's payment fits the cash the business can spare, which is where an equal-principal schedule is tightest.
Can a business repay a term loan faster than the schedule?: Usually, on terms the facility agreement sets. Floating-rate loans can often be prepaid on an interest date at little cost, while a fixed-rate loan may carry a break cost if market rates have fallen, and some loans carry a prepayment fee. The agreement also says whether an extra payment shortens the loan or reduces later instalments, which changes the cash the business has to find next year. It is worth reading that clause before making the payment.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Business relationship managerCarries a book of trading businesses — wins them, keeps them, and is the bank's voice when the answer is no.
Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Lending operations officerTurns an approval into a working facility — documentation, security, drawdown, and the register that says what the bank actually holds.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE NUMBER · THE LOAN · CAPACITY

A company asks to refinance. Its year in four numbers:

EBITDA: US$6m
Capex + tax: US$2m
Interest: US$1m
Principal due: US$2m

What is its debt service cover, on cash available after capital spending and tax?

5 MORE ON THE LOAN · CAPACITY →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHAmortisation What is amortisation on a term loan, and why do banks insist on it?