Amortization Equations:
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Amortization is the process of spreading out a loan into a series of fixed payments over time. Each payment covers both principal and interest, with the interest portion decreasing and principal portion increasing over the life of the loan.
The calculator uses these amortization equations:
Where:
Explanation: Early payments are mostly interest, while later payments apply more toward principal as the balance decreases.
Details: Understanding amortization helps borrowers see how much of each payment goes toward interest vs. principal, and how extra payments can reduce total interest paid.
Tips: Enter the initial loan amount, annual interest rate, loan term in months, and fixed monthly payment. The calculator will show the breakdown of each payment.
Q1: Why does most of my early payment go to interest?
A: This is normal in amortizing loans. Since interest is calculated on the current balance, and the balance is highest at the beginning, interest charges are highest early in the loan.
Q2: How can I pay less interest overall?
A: Making extra principal payments reduces the balance faster, which reduces future interest calculations.
Q3: What happens if I make a larger payment?
A: Any amount above the required payment typically goes entirely toward principal, accelerating your payoff date.
Q4: Why is my final payment slightly different?
A: Due to rounding in calculations, the final payment might need a small adjustment to fully pay off the loan.
Q5: Does refinancing affect amortization?
A: Yes, refinancing resets the amortization schedule, typically extending the loan term and changing the interest rate.