What Is it amortization? See the different types and how to choose the best one!

If you've ever heard of financing, loans, or long-term contracts, you've probably come across the term "amortization." But what exactly does it mean? How does it work? And what are the different types of amortization available?

In this comprehensive guide, we'll answer these questions and more. We'll explore the concept of amortization, discuss the most common types, and explain how to calculate and choose the best option for your financial needs.

What is Amortization?

Amortization is a term widely used in finance and refers to the gradual payment of a debt or loan over time. It's the process by which you reduce the original outstanding balance through regular payments, which typically include part of the principal (the original amount of the debt) and interest.

Here, it's important to highlight the difference between interest and amortization. Interest represents the cost of borrowing money and is calculated based on the remaining outstanding balance. Amortization, on the other hand, is the part of the payment that actually reduces the debt balance.

How Does Amortization Work?

To understand how amortization works, it's essential to understand the most common types of amortization systems. We'll cover three of the most commonly used systems: Constant Amortization, the SAC Table (Constant Amortization System), and the Price Table (French Amortization System).

What are the types of amortization?

These are the main types of amortization that exist:

• SAC Table (Constant Amortization System)
• Price Table (French Amortization System)

Each type of amortization has its own specific characteristics, which can significantly affect the value of the installments and the total amount to be paid over time.

Below, we'll detail each of these types so you can better understand their specificities and choose the option that best suits your financial needs.

SAC Table (Constant Amortization System):

The Constant Amortization system, also known as the SAC Table (Constant Amortization System), is a method used to pay debts and financing.

In this system, monthly installments are fixed and include a portion of the principal (the original amount of the debt) and a portion of the interest. The key feature of this system is that the amortization amount increases over time, while the interest portion decreases.

Example of SAC Table:

Suppose you're financing R$50,000 in 10 monthly installments at an interest rate of R$21,300 per month. Here's how the SAC Table works:

Price Table (French Amortization System):

The Price Table, also known as the French amortization system, features fixed installments, consisting of an interest portion and an amortization portion. The main difference from Constant Amortization is that, in the Price Table, the interest portion decreases over time, while the amortization portion increases.

Price Table Amortization Example:

Let's consider a R$30,000 loan with a monthly interest rate of R$1.51 per month and a 12-month term. Below is a table illustrating how amortization works in the Price Table:

Differences between Progressive and Increasing Amortization:

Progressive amortization, as in the SAC Table, involves decreasing installments. This means that as you pay installments, the amount allocated for amortization increases, while the interest decreases. This system is suitable for those who want to reduce their debt more quickly.

On the other hand, increasing amortization, as in the Price Table, presents constant installments with the amortization portion increasing over time. This can be advantageous for those seeking predictability in monthly payments.

How to Calculate Amortization

Calculating amortization is essential to understanding the debt and financing repayment process. Amortization represents the portion of the payment that effectively reduces the debt balance, and it's important to know how to calculate this value.

Choosing the Best Type of Amortization for You

The choice of amortization system depends on your needs and financial goals. If you want to pay less interest over time and are willing to pay higher initial installments, constant or progressive amortization may be a suitable option. On the other hand, if you prefer fixed and predictable installments, the Price Table may be more appropriate.

It is important to understand the particularities of each one to choose the option that best adapts to your financial reality, even considering the possibility of refinancing, if necessary.

Remember, it's essential to understand the terms and conditions of your financing or loan agreement before making a decision.