Dear Rescue Capital,
What is the difference between an annuity and amortization? I understand both of them are used for multiple payments but how do they differ?
John in West Berlin, NJ
An annuity is a financial product used to grow money in order to give the owner a constant stream of payments in the future, such as when they retire or a structured settlement. Annuities can be paid for a specific period of time such as 20 years or during the annuity owner's life time. Some are paid in fixed monthly, quarterly or yearly payment streams.
Amortization, on the other hand, is paying off debt in regular installments over a period of time such as with a mortgage or loan. With each payment that you make, a portion of your payment is applied towards reducing your principal and another portion of your payment is applied towards paying the interest on the loan. It can also be the deduction of capital expenses over a specific period of time (usually over the asset's life). Amortization measures the consumption of the value of intangible assets, such as a patent or a copyright. It is similar to depreciation except that depreciation is used when referring to tangible assets like a building, or equipment and amortization is used solely for intangible assets.