1. What is Loan Amortization?

Loan amortization is the process of spreading out a loan into a series of fixed payments over time. Each payment consists of both principal and interest, 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:

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

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

3. Importance of Loan Amortization

Details: Understanding amortization helps borrowers see how much of each payment goes toward interest vs. principal, plan for refinancing, and understand the true cost of borrowing.

4. Using the Calculator

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

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between amortization and simple interest?
A: Amortization accounts for compound interest and changing principal balance, while simple interest is calculated only on the original principal.

Q2: How can I pay less interest over the life of the loan?
A: Make extra principal payments, choose a shorter loan term, or secure a lower interest rate.

Q3: Why does most of my early payment go toward interest?
A: Early in the loan, the principal balance is highest, so interest charges are largest. This shifts as the principal decreases.

Q4: What's an amortization schedule?
A: A table showing each payment's breakdown between principal and interest, and the remaining balance after each payment.

Q5: Does this work for all types of loans?
A: This applies to standard fixed-rate loans. Adjustable-rate, interest-only, or balloon loans require different calculations.