What is Amortization? Amortization is defined as the payment of any obligation through a series of installments or transfers. Thus what we can understand from this is that when we make a purchase, be it by paying direct cash or through a credit card, we can choose to make the payment via monthly installments of reduced amounts. This is done since if the value of the product or the service that we wish to purchase is rather high, then it would be unfair to expect everyone to have such large amount of cash at hand. When a person has a steady source of income every month, they can choose to make the payment for the product or service by sending in monthly installments of predetermined and mutually agreed upon values.

This entire process is called amortization and the number of months over which the customer chooses to make the entire payment is called the amortization period. Thus we can see that amortization is a rather common process and is hence not out of place in today's commercial world. Almost all stores and shops now offer amortization of the payments of most highly priced products. For example homes, cars and any other expensive products or services can be paid for through an amortization scheme.

When a person chooses to pay through an installment scheme, then he or she must realize that they are paying an amount that would end up being a bit more than the actual value of the product or service. This is because a component of any amortization scheme is the rate of interest that is applied to the original value of the product or service. This is always present because the agency or company require some incentive to provide this service of amortization and hence they make more money compared to the situation when the customer makes a onetime payment.

Usually the rates of interest involved are pretty low and hence it is not much of an issue. The problem for customers arises when they choose to pay the total amount in an installation scheme using a credit card. In that case, along with the interest that is introduced by the company or agency from whom we are making the purchase, there is also the added interest of the credit card company that we have to pay. Thus we might end up paying a lot more than necessary, sometimes even twenty to thirty per cent more!

Thus we must always be rather cautious and think it through before we agree to have an amortization scheme that is paid using a credit card. Keeping that aside, this type of payment has more or less revolutionized the commercial industry. Due to introduction of such schemes of payment, people who could never before dream of amassing enough cash to come to the store and make a onetime payment can now purchase whatever they need and just make sure that they make the payments in time.

One shouldn't forget that such amortization agreements have clauses protecting the agency or company, that state that in the case of non payment of a certain number of installments, the product or service can be revoked or withdrawn without any due notice. What is Amortization?

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