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 loan payment formula:

Where:

• \( PMT \) — Monthly payment amount
• \( P \) — Principal loan amount
• \( r \) — Monthly interest rate (annual rate ÷ 12)
• \( n \) — 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 Loan Calculation

Details: Understanding your monthly payment helps with budgeting and financial planning. It also shows the true cost of borrowing by revealing total interest paid over the loan term.

4. Using the Calculator

Tips: Enter the loan amount, annual interest rate (as a percentage), 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 principal, while APR includes interest plus other loan fees, representing the true cost of the loan.

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

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

Q4: What's the impact of a larger down payment?
A: A larger down payment reduces the principal amount borrowed, resulting in lower monthly payments and less total interest paid.

Q5: Are there loans that don't amortize?
A: Yes, interest-only loans and balloon payment loans have different payment structures that don't fully amortize over the term.