1. What is Loan Amortization?

Loan amortization is the process of paying off a debt over time through regular payments. Each payment covers both interest and principal, with the interest portion decreasing and principal portion increasing over the life of the loan.

2. How Does the Calculator Work?

The calculator uses the standard amortization formula:

Where:

• \( PMT \) — Monthly payment amount
• \( P \) — Principal loan amount
• \( r \) — Monthly interest rate (annual rate ÷ 12)
• \( n \) — Total number of payments (loan term in years × 12)

Explanation: The formula calculates the fixed monthly payment required to fully amortize a loan over its term, accounting for compound interest.

3. Importance of Amortization Calculation

Details: Understanding amortization helps borrowers see how much of each payment goes toward principal vs. interest, plan for refinancing, and compare different loan options.

4. Using the Calculator

Tips: Enter the loan amount in dollars, annual interest rate as a percentage (e.g., 5.25), and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between interest rate and APR?
A: The interest rate is the cost of borrowing the principal, while APR includes the interest rate plus other loan fees.

Q2: How can I pay less interest overall?
A: Make extra principal payments, choose a shorter loan term, or refinance at a lower rate when possible.

Q3: Why does most of my early payment go toward interest?
A: With amortized loans, interest is calculated on the outstanding balance, which is highest at the beginning.

Q4: What's an amortization schedule?
A: A table showing each payment's allocation between principal and interest, and the remaining balance.

Q5: How does loan term affect payments?
A: Shorter terms mean higher monthly payments but less total interest paid over the life of the loan.