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 goes toward both principal and interest, with the interest portion decreasing over time while the principal portion increases.

2. How Does the Calculator Work?

The calculator uses the 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 pay off the loan over its term, accounting for compound interest.

3. Importance of Amortization

Details: Understanding amortization helps borrowers see how much of each payment goes toward principal vs. interest, plan for refinancing, and understand the true cost of borrowing.

4. Using the Calculator

Tips: Enter the loan amount in USD, annual interest rate as a percentage (e.g., 3.5 for 3.5%), 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 (Annual Percentage Rate) includes interest plus other loan fees.

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

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 of the loan term.

Q4: What's the benefit of a shorter loan term?
A: Shorter terms typically have lower interest rates and much less total interest paid, though monthly payments are higher.

Q5: Can I change my payment amount later?
A: Some loans allow recasting (adjusting payments after a large principal payment), or you may refinance to new terms.