1. What is Loan Amortization?

Amortization is the process of spreading out a loan into a series of fixed payments over time. Each payment consists of both principal and interest, with the interest portion decreasing and the principal portion increasing over the life of the loan.

2. How Does the Calculator Work?

The calculator uses these amortization formulas:

Where:

• \( Interest_k \) — Interest portion of payment k
• \( Principal_k \) — Principal portion of payment k
• \( Balance_k \) — Remaining balance after payment k
• \( r \) — Monthly interest rate (annual rate ÷ 12)
• \( PMT \) — Fixed monthly payment amount

Explanation: The formulas show how each payment is divided between interest and principal, and how the balance decreases over time.

3. Importance of Amortization

Details: Understanding amortization helps borrowers see how much of each payment goes toward interest versus principal, the total interest cost of the loan, and how extra payments can reduce the loan term.

4. Using the Calculator

Tips: Enter the loan amount, annual interest rate, and loan term in years. The calculator will show the monthly payment, total interest, and complete amortization schedule.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between interest and principal?
A: Interest is the cost of borrowing, while principal is the amount applied to reduce the loan balance.

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

Q3: Why does early interest seem so high?
A: Early payments have higher interest because the balance is at its maximum.

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

Q5: Does amortization work the same for all loans?
A: Most fixed-rate loans amortize this way, but adjustable-rate or interest-only loans differ.