Let’s suppose that company A has an outstanding debt of £5 million. If that company repaid £250,000 of that loan every year, it would be said that £250,000 of the debt is being amortised each year. However, company A would also need to pay interest on the loan. The interest rate is represented by the letter ‘r’ in the above graphic.
In this case, if we suppose that the interest rate is set at 10%, then company A would actually need to repay £275,000 per year for the debt to be fully amortised.
As another example, let’s say that you had been given ten years to repay £1.5 million in business loans to a bank on a monthly basis. In order to work out your monthly amortisation obligations, you would divide £1.5 million by ten, giving you £150,000 per year.
You would then divide this by 12, giving you £12,500 which you would need to repay each month until the debt was fully amortised. Accounting for a 5% interest rate, your final total to be repaid each month would be £13,125.