1. What is Loan Amortization?

Loan amortization is the process of paying off a debt over time through regular payments. Each payment covers both interest and principal, 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:

Where:

• \( PMT \) — Monthly payment amount
• \( P \) — Principal loan amount
• \( r \) — Monthly interest rate (annual rate divided by 12)
• \( n \) — Number of payments (loan term in months)

Explanation: The formula calculates the fixed monthly payment required to fully amortize a loan over its term.

3. Importance of Loan Comparison

Details: Comparing two loan options helps borrowers understand the true cost of each loan and make informed financial decisions. Key factors include monthly payment amount, total interest paid, and loan term.

4. Using the Calculator

Tips: Enter principal amount in dollars, monthly interest rate as a decimal (e.g., 0.005 for 0.5%), and number of months. The calculator will compute and compare monthly payments for both loans.

5. Frequently Asked Questions (FAQ)

Q1: How do I convert APR to monthly rate?
A: Divide the annual percentage rate by 12 (months) and by 100 (to convert from percentage to decimal).

Q2: Why compare two loans?
A: Comparing helps identify which loan offers better terms - lower payments, less interest, or shorter term.

Q3: What's included in the monthly payment?
A: This calculation shows principal and interest only. Actual payments may include taxes and insurance.

Q4: How does loan term affect payments?
A: Shorter terms mean higher monthly payments but less total interest. Longer terms reduce monthly payments but increase total interest.

Q5: Can I calculate extra payments?
A: This calculator shows standard amortization. Extra payments require more complex calculations.