1. What is the Annual Payment Formula?

The annual payment formula calculates the fixed payment amount required to fully amortize a loan over its term, including both principal and interest components.

2. How Does the Calculator Work?

The calculator uses the standard amortization formula:

Where:

• \( P \) — Principal loan amount ($)
• \( r \) — Annual interest rate (as decimal)
• \( n \) — Loan term in years
• \( PMT \) — Annual payment amount

Explanation: The formula accounts for the time value of money, calculating equal payments that cover both interest and principal repayment over the loan term.

3. Importance of Loan Amortization

Details: Understanding amortization helps borrowers see how much of each payment goes toward interest vs. principal, and the total cost of borrowing over the loan's lifetime.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 5.25 for 5.25%), and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between annual and monthly payments?
A: Monthly payments use a monthly interest rate (annual rate/12) and term in months (years×12). Annual payments are larger but made less frequently.

Q2: How does interest rate affect payments?
A: Higher rates increase both the payment amount and total interest paid over the loan term.

Q3: What is an amortization schedule?
A: A table showing each payment's breakdown between principal and interest, and the remaining balance after each payment.

Q4: Can I calculate payments for different compounding periods?
A: Yes, but the formula needs adjustment. This calculator assumes annual compounding matching payment frequency.

Q5: How accurate is this calculator?
A: It provides precise mathematical results, but actual loan terms may include additional fees or different compounding methods.