Amortization is a key term in any financial decision involving loans, investments, or asset management. But not everyone knows what it is, the different types, and even less, how to calculate it in 2025.

That’s why we’ve prepared this short guide to explain what you need to know, including how to do the calculations with examples. This way, you’ll be better equipped to apply for a loan, assess your monthly payments, or plan your finances with more control and confidence.

Amortization in 2025: What It Is, Types, and How to Calculate It

What is amortization?

It’s a process that can apply to both assets and debts, so its meaning can vary depending on the context.

In the case of an asset—for example, a car or a cellphone—it means acknowledging that it no longer holds the same value as when it was new. Whereas as a liability process, it refers to the gradual repayment of a debt. This is what happens, for instance, with a mortgage or a secured loan.

Both uses share a key idea: the progressive allocation of a value over time.

Types of amortization

There are several types of amortization because, as mentioned, the term is used in different contexts. Therefore, there are multiple ways to apply it, depending on the goal.

Below, we’ll break down the types of amortization by category:

Accounting amortization (of assets)

This describes how the cost of an asset is distributed over its useful life, recognizing its loss of value year by year.

Most commonly used methods:

• Straight-line amortization: The simplest and most popular, where the asset’s value is divided equally over its useful life.

• Declining balance amortization: A higher percentage is applied initially, making the first payments or records larger.

• Units of production amortization: Based on actual usage of the asset, such as hours of operation or units produced.

• Accelerated amortization: Allows higher amortization to be recorded in the early years of the asset’s useful life. Ideal for assets that depreciate quickly.

Financial amortization (of loans)

This focuses on the periodic repayment of a loan in installments, including interest and principal.

Common systems include:

• French system: A fixed regular installment that combines principal and interest, very common in loans and mortgages.

• German system: The amortized capital is constant, but interest decreases over time, making the installments smaller.

• American system (bullet): Only interest is paid during the loan term, and the principal is paid off at the end in a single payment.

The applied interest rate directly impacts the total amount you'll end up paying.

Technical or economic amortization

This doesn’t rely on an accounting formula but rather on the real performance of the asset.

It tells us when, even though the asset still works, it’s no longer profitable to keep and should be replaced. For example, a machine that still runs but costs more in maintenance than it produces.

Investment amortization

This type is also known as payback period. It’s a method used to calculate the time it takes for an investment to recover its initial cost through generated returns.

Now then, before continuing with amortization examples, let’s talk about taxes.

Amortization and Taxes

In Mexico, if you purchase a fixed asset for your business, you can deduct its amortization when calculating income tax (ISR). Instead of subtracting the full expense at once, you do so gradually over the years you plan to use the asset.

According to Articles 31, 32, and 33 of the LISR, you can legally and properly reduce your taxable base—provided the asset is properly recorded and used to generate income.

Additionally, if the acquired asset included IVA, it may be credited in your tax return. However, to do so you must meet tax requirements, such as ensuring the supplier is registered with the SAT.

How to Calculate Amortization [+ Examples]

There is no one-size-fits-all formula, as it depends on what you're amortizing and which method you're using. So, for the following amortization examples, we'll use the most common methods:

Example of Straight-Line Method for Assets

Let’s suppose that when starting your business you purchased a professional server for 120,000 MXN. You estimate that at the end of its useful life you could sell it for 20,000 MXN, and plan to use it for 5 years.

The data needed for this formula are:

• Acquisition cost of the asset: 120,000 MXN.

• Residual value (what it’ll be worth at the end): 20,000 MXN.

• Useful life in years: 5.

Formula: (Acquisition cost – Residual value) ÷ Useful life.

To spread its cost over time, calculate the annual amount:

Annual amount = (120,000 − 20,000) ÷ 5 = 20,000 MXN per year.

How to Calculate the Amortization of a Loan

The financial amortization of a loan is the process of repaying in periodic installments (monthly, quarterly, etc.). These include part of the principal and part of the interest.

To calculate these installments in Mexico, the French system is often used.

Let’s say you took out a loan for 100,000 MXN over 12 months with an annual interest rate of 12%.

The formula includes the following data:

• Total loan amount: 100,000 MXN.

• Monthly interest rate: 12% ÷ 12 = 1% = 0.01.

• Total number of payments: 12.

Formula: Monthly installment = (Loan × monthly rate × (1 + rate)^n) ÷ ((1 + rate)^n − 1).

Applying the formula, the monthly installment would be:

Monthly payment = (100,000 × 0.01 × (1 + 0.01)^12) ÷ ((1 + 0.01)^12 − 1) = $8,885.29 MXN.

Final Words

Knowing the types of amortization and how to calculate them helps you plan with greater accuracy—whether you're repaying a loan, evaluating an investment, or running a business.

It can be considered a tool for making better financial and tax-related decisions. Just like DolarApp, which allows you to make international transactions more easily.

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