Technical Tip: Amortization vs. Maturity

Amortization and maturity are frequent terms heard in the financial industry. Both have important uses in business lending, but what is the difference?

CUBG’s expert staff provided this tip in response to a question we hear frequently from our clients.

Q:

What is the difference between amortization and maturity, and can these terms be used mutually?

A:

Although both terms revolve around the final payment of a loan, amortization and maturity have very distinct differences, and are not interchangeable terms.

What is amortization?

Amortization is an accounting technique used to periodically lower the book value of a loan (or other intangible asset) over a set period of time. Amortization is used in the process of paying off debt through regular principal and interest payments over time. A balloon payment consisting of the unpaid remaining balance of the principal and interest will be due at maturity.

What is maturity?

In finance, the maturity date refers to the final payment date of a loan or other financial instrument, at which point the principal (and all remaining interest) is due to be paid in full.

Amortization vs. Maturity

Amortization is the schedule of loan payments, and the maturity is the date the loan term ends. The amortization period and maturity term can be the same, but sometimes the amortization is longer than the maturity. For example, the loan payment schedule (amortization) can be calculated over a 20 year period, but the loan term (maturity) ends after 15 years. At the end of the loan term, the remaining principal and interest will be due.

Federal Regulations

NCUA regulations set limits for loan maturities for federally chartered credit unions. Regulation §701.21(c)(4) states that the maturity of a loan to a member may not exceed 15 years. There are some exceptions to this regulation – see the full regulation for more details.

Loan Maturity and Loan Documents

For credit unions using CUBG for loan documentation – the loan maturity and amortization are important parts of the documentation request form.

Please contact info@cubg.org for any additional questions or clarifications on this topic.

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