Installment Loan Amortization Calculator

Amortization Formula:

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

Principal Amount (P):

Annual Interest Rate:

Loan Term:

Monthly Payment:

Total Payment:

Total Interest:

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1. What is Loan Amortization?

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

2. How Does the Calculator Work?

The calculator uses the standard amortization formula:

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

Where:

\( PMT \) — Monthly payment amount
\( P \) — Principal loan amount
\( r \) — Monthly interest rate (annual rate ÷ 12)
\( n \) — Total number of payments (loan term in months)

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

3. Importance of Amortization Calculation

Details: Understanding amortization helps borrowers see the true cost of a loan, plan their finances, and make informed decisions about loan terms and prepayment options.

4. Using the Calculator

Tips: Enter the loan amount in dollars, annual interest rate as a percentage, and loan term in either years or months. 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 includes additional fees and costs to reflect the total cost of the loan.

Q2: How does making extra payments affect my loan?
A: Extra payments reduce the principal faster, saving interest and potentially shortening the loan term.

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

Q4: What's better - shorter term with higher payments or longer term with lower payments?
A: Shorter terms typically have lower interest rates and cost less overall, but require higher monthly payments.

Q5: Can I calculate amortization for variable rate loans?
A: This calculator assumes a fixed rate. Variable rate loans require more complex calculations as payments may change.