1. What is Loan Amortization?

Amortization is the process of spreading out a loan into fixed payments over time. Each payment covers both principal and interest, with the interest portion decreasing and principal portion increasing over the loan term.

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)
• \( n \) — Number of payments (loan term in years × 12)

Explanation: The formula calculates the fixed payment amount required to fully repay a loan with interest over a specified term.

3. Importance of Amortization Calculation

Details: Understanding amortization helps borrowers see the true cost of a loan, plan their finances, and compare different loan options effectively.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate, and loan term in years. All values must be positive numbers (rate between 0-100%).

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 fees to show the total cost of the loan.

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

Q3: Why does early payment go mostly toward interest?
A: The interest is calculated on the outstanding balance, which is highest at the beginning of the loan term.

Q4: Are there loans that don't amortize?
A: Yes, interest-only loans and balloon payment loans have different payment structures.

Q5: How does loan term affect payments?
A: Shorter terms mean higher monthly payments but less total interest paid over the life of the loan.