Loan Amortization Calculator Monthly Compounding

Loan Amortization Formula:

\[ PMT = P \times \frac{r \times (1 + r)^n}{(1 + r)^n - 1} \]

Monthly Payment (PMT):

Total Payment:

Total Interest:

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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 principal and interest, with the interest portion decreasing over time while the principal portion increases.

2. How Does the Calculator Work?

The calculator uses the loan amortization formula:

\[ PMT = P \times \frac{r \times (1 + r)^n}{(1 + r)^n - 1} \]

Where:

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

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

3. Importance of Loan Amortization

Details: Understanding loan amortization helps borrowers see how much they're paying in interest versus principal, plan for the future, and make informed decisions about refinancing or prepayment.

4. Using the Calculator

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

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple interest and amortized loans?
A: Simple interest calculates interest only on the principal, while amortized loans calculate interest on the remaining balance, which decreases over time.

Q2: How does extra payment affect amortization?
A: Extra payments reduce the principal faster, decreasing total interest paid and potentially shortening the loan term.

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

Q4: What's the difference between APR and interest rate?
A: APR includes both interest rate and other loan fees, giving a more complete picture of borrowing costs.

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