Loan Amortisation

Loan amortisation is the scheduled repayment of a loan over its term. The borrower pays fixed or variable installments that gradually reduce the outstanding amount. At the end of the term, the loan has been fully repaid.

Three basic forms are common. Under annuity repayment the total instalment stays constant, while the interest share falls and the principal share rises. Straight-line repayment uses a constant principal amount, so the total burden falls over time. Under bullet repayment only interest is paid during the term and the full amount falls due at maturity. In acquisition finance the repayment profile largely determines how much free cash flow remains for growth and distributions. Classic bank structures use amortising tranches repaid over roughly five to seven years, while institutional tranches such as a term loan B carry only light ongoing amortisation, often one percent of nominal per year, with the balance at maturity. This is regularly combined with a cash sweep applying an agreed share of excess cash flow to early repayment, with the percentage stepping down once leverage falls below defined levels.

Loan amortisation should be distinguished from the accounting amortisation of intangible assets, which shares the English term but is a non-cash expense. For the borrower, besides the amount, the key question is whether early repayment is possible without a prepayment penalty, since this determines flexibility in a later refinancing or sale. Together with interest rate, tenor and covenants, the repayment profile produces the debt service against which metrics such as the debt service coverage ratio are measured.

Beyond the profile, the currency and interest basis matter, because floating rate loans raise the burden when rates rise without any change to the repayment schedule. Hedging through interest rate swaps or caps is therefore common, and its cost belongs in the financing calculation. In a buyout model amortisation is projected year by year, because it drives the development of net debt and ultimately the equity value at exit.