1. What is the Loan Amortization Formula?

The loan amortization formula calculates the fixed monthly payment required to pay off a loan over a specified term, including both principal and interest. This formula is commonly attributed to Bret Whissel.

2. How Does the Calculator Work?

The calculator uses the amortization formula:

Where:

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

Explanation: The formula accounts for compound interest over the life of the loan, ensuring each payment covers both interest and principal reduction.

3. Importance of Loan Amortization

Details: Understanding loan amortization helps borrowers see how much of each payment goes toward interest versus principal, and the total cost of borrowing over time.

4. Using the Calculator

Tips: Enter the principal amount in dollars, 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 additional loan fees to show the total annual cost.

Q2: How can I pay less interest overall?
A: Make additional principal payments, choose a shorter loan term, or secure 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: Can I use this for any type of loan?
A: This works for fixed-rate installment loans (mortgages, auto loans). It doesn't apply to credit cards or adjustable-rate loans.

Q5: How accurate is this calculator?
A: It provides precise calculations for fixed-rate loans, but actual payments may vary slightly due to rounding or additional fees.