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Loan Amortization Formula:
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Loan amortization is the process of spreading out a loan into fixed payments over time. Each payment covers both principal and interest, with the interest portion decreasing and principal portion increasing over the loan term.
The calculator uses the standard amortization formula:
Where:
Explanation: The formula calculates the fixed monthly payment required to fully repay a loan over its term, accounting for compound interest.
Details: Understanding your amortization schedule helps with financial planning, shows the true cost of borrowing, and helps compare different loan options. In the UK, most mortgages and personal loans use amortization.
Tips: Enter the principal amount in GBP, annual interest rate (typical UK rates are 2-6% for mortgages, 5-20% for personal loans), and loan term in years. The calculator will show your monthly payment, total repayment, and total interest.
Q1: What's the difference between amortizing and interest-only loans?
A: Amortizing loans pay down principal and interest each month, while interest-only loans require only interest payments for a period before full repayment begins.
Q2: How does loan term affect payments?
A: Longer terms reduce monthly payments but increase total interest paid. Shorter terms have higher payments but lower total cost.
Q3: Are UK mortgage calculations different?
A: Most UK mortgages use monthly compounding like this calculator, but some may use daily or annual compounding which slightly affects payments.
Q4: What about fees and insurance?
A: This calculator shows principal and interest only. UK loans often have arrangement fees, valuation fees, and sometimes insurance costs that aren't included here.
Q5: Can I make overpayments?
A: Many UK loans allow overpayments (typically up to 10% per year without penalty), which reduce the loan term and total interest. This calculator doesn't account for overpayments.