Declining Balance Loan Amortization Schedule

Loan Payment Formula:

\[ PMT = P \times \frac{r \times (1 + r)^n}{(1 + r)^n - 1} \]

Monthly Payment:

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1. What is a Declining Balance Loan?

A declining balance loan (also called an amortizing loan) is a loan where the principal balance decreases over time as payments are made. Each payment covers both interest and principal, with the interest portion decreasing and principal portion increasing over time.

2. How Does the Calculator Work?

The calculator uses the standard loan payment formula:

\[ PMT = P \times \frac{r \times (1 + r)^n}{(1 + r)^n - 1} \]

Where:

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

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

3. Understanding the Amortization Schedule

Details: The amortization schedule shows how each payment is split between principal and interest, and how the loan balance decreases over time. Early payments are mostly interest, while later payments are mostly principal.

4. Using the Calculator

Tips: Enter the loan amount in dollars, annual interest rate as a percentage (e.g., 5.25), and loan term in years. The calculator will show your monthly payment and full amortization schedule.

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 includes fees and other loan costs to give a more complete picture of borrowing costs.

Q2: How can I pay less interest overall?
A: Making extra principal payments reduces the loan balance faster, resulting in less total interest paid over the life of the loan.

Q3: Why does most of my early payment go to interest?
A: Interest is calculated on the current balance, which is highest at the beginning of the loan. As the balance decreases, more of each payment goes to principal.

Q4: What happens if I make a larger payment?
A: Extra payments directly reduce the principal, which means you'll pay off the loan faster and pay less total interest.

Q5: Are there loans that don't amortize?
A: Yes, interest-only loans and balloon loans have different payment structures where the principal doesn't decline as steadily.