1. What is the Amortization Formula?

The amortization formula calculates periodic loan payments based on principal, interest rate, and number of periods. It can be rearranged to solve for any missing variable when the others are known.

2. How Does the Calculator Work?

The calculator uses the amortization formula:

Where:

• \( PMT \) — Periodic payment amount
• \( P \) — Principal loan amount
• \( r \) — Periodic interest rate (annual rate ÷ periods per year)
• \( n \) — Total number of payments

Explanation: The formula accounts for both principal repayment and interest charges in each payment.

3. Importance of Amortization Calculation

Details: Understanding amortization helps borrowers see how much of each payment goes toward principal vs. interest, and how changing variables affects the loan terms.

4. Using the Calculator

Tips: Select which variable you want to solve for, then enter the other three known values. All values must be valid (positive numbers).

5. Frequently Asked Questions (FAQ)

Q1: Why can't the calculator solve for interest rate directly?
A: The rate variable cannot be isolated algebraically; it requires numerical methods like Newton-Raphson iteration.

Q2: What's the difference between nominal and effective interest rate?
A: Nominal is the stated rate, while effective accounts for compounding. Use periodic rate (nominal ÷ periods) in calculations.

Q3: How does extra principal payment affect amortization?
A: Extra payments reduce principal faster, decreasing total interest paid and potentially shortening loan term.

Q4: What's an amortization schedule?
A: A table showing each payment's allocation to principal and interest, and the remaining balance over the loan term.

Q5: Can this be used for mortgages?
A: Yes, but ensure rate and periods match (e.g., monthly rate for monthly payments on a 30-year mortgage would use n=360).