1. What is Loan Amortization?

Loan 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 principal portion increasing over the life of the loan.

2. How Does the Calculator Work?

The calculator uses the loan amortization formula:

Where:

• \( P \) — Principal loan amount ($)
• \( r \) — Annual interest rate (decimal)
• \( n \) — Loan term in years
• \( PMT \) — Annual payment amount

Explanation: The formula calculates the fixed payment amount required to fully pay off a loan over its term, accounting for both principal and interest.

3. Importance of Loan Amortization

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

4. Using the Calculator

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

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between annual and monthly amortization?
A: This calculator shows annual payments. For monthly payments, divide the annual rate by 12 and multiply years by 12.

Q2: How does a higher interest rate affect payments?
A: Higher rates increase the total payment amount as more money goes toward interest rather than principal.

Q3: What is an amortization schedule?
A: A table showing the breakdown of each payment into principal and interest components over the life of the loan.

Q4: How can I pay less interest overall?
A: Make additional principal payments when possible, choose a shorter loan term, or negotiate a lower interest rate.

Q5: Does this work for all types of loans?
A: This formula works for standard fixed-rate loans. Adjustable-rate or interest-only loans require different calculations.