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Loan Amortization Formula:
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Loan amortization is the process of paying off a debt over time through regular payments. An amortization schedule shows the breakdown of each payment into principal and interest, and how the loan balance decreases over time.
The calculator uses the standard amortization formula:
Where:
Extra Payments: Additional payments are applied directly to the principal, reducing both the loan term and total interest paid.
Details: Even small extra payments can significantly reduce the loan term and total interest. For example, an extra $100/month on a $300,000 mortgage at 4% can save over $30,000 in interest and pay off the loan 5 years early.
Tips: Enter the principal amount, annual interest rate, loan term in years, and any additional monthly payment you plan to make. All values must be positive numbers.
Q1: How do extra payments affect amortization?
A: Extra payments reduce principal faster, decreasing both the loan term and total interest paid. Each extra dollar goes entirely toward principal.
Q2: Should I pay extra principal or refinance?
A: Compare the savings from extra payments versus refinancing costs. Extra payments are flexible with no fees, while refinancing may offer lower rates but has closing costs.
Q3: Are there prepayment penalties?
A: Most modern loans don't have prepayment penalties, but check your loan agreement. Some mortgages have penalties if you pay off too much in early years.
Q4: What's better - extra payments or shorter term?
A: Mathematically similar, but shorter terms usually have lower rates. Extra payments offer more flexibility if your financial situation changes.
Q5: How to maximize savings with extra payments?
A: Make payments early in the loan term when interest is highest. Consider biweekly payments (26 half-payments = 13 full payments per year).