Loan Amortization Calculator Money Smart

Amortization Formulas:

\[ Interest_k = Balance_{k-1} \times r \] \[ Principal_k = PMT - Interest_k \] \[ Balance_k = Balance_{k-1} - Principal_k \]

Monthly Payment:

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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 these amortization formulas:

\[ Interest_k = Balance_{k-1} \times r \] \[ Principal_k = PMT - Interest_k \] \[ Balance_k = Balance_{k-1} - Principal_k \]

Where:

\( Interest_k \) — Interest portion of payment k
\( Principal_k \) — Principal portion of payment k
\( Balance_k \) — Remaining balance after payment k
\( r \) — Monthly interest rate (annual rate ÷ 12)
\( PMT \) — Fixed monthly payment amount

Explanation: The formulas show how each payment is split between interest and principal, and how the remaining balance decreases over time.

3. Importance of Amortization Schedule

Details: An amortization schedule helps borrowers understand how much of each payment goes toward interest versus principal, the total interest paid over the loan term, and how extra payments can shorten the loan term.

4. Using the Calculator

Tips: Enter the loan amount, annual interest rate, and loan term in years. The calculator will show the monthly payment and full amortization schedule.

5. Frequently Asked Questions (FAQ)

Q1: Why does most of my early payment go to interest?
A: Early in the loan, the balance is highest so interest charges are largest. As the balance decreases, more of each payment goes toward principal.

Q2: How can I pay less interest overall?
A: Make extra principal payments, refinance at a lower rate, or choose a shorter loan term.

Q3: What's the difference between interest rate and APR?
A: The interest rate is the cost of borrowing, while APR includes fees and other loan costs to show the true annual cost.

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

Q5: Can I use this for different payment frequencies?
A: This calculator assumes monthly payments. For biweekly or weekly payments, adjustments to the interest rate calculation would be needed.