Amortization is the paydown of a loan over time, while depreciation is used when an asset goes down in value over time. Depreciation is separate from a loan with amortization, and does not actually change the amount of money owed on a loan, it only changes the value of an asset. This can be explained in relation to machinery. For example, a business may purchase a new machine and depreciate it over time, so it does not incur the total cost in one period. If a business purchased a $100,000 machine and expects to use it for 5 years, it can depreciate $20,000 per year with the straight line depreciation method. This smooths out its expenses over time and it won’t have to incur a $100,000 expense in the first year. A vehicle owner can also think about depreciation when buying a car with a loan. If depreciation of the vehicle occurs faster than the loan amortization, the vehicle owner will be underwater, or have negative equity, on the loan. This means they owe more than the car is worth and would take a loss if they had to sell. But if loan amortization occurs faster than the vehicle depreciates, the car is worth more than the loan. If they sell in this scenario, they would make money.