1. What is the Loan Amortization Formula?

The loan amortization formula calculates periodic loan payments based on principal, interest rate, and number of payments. It can be rearranged to solve for any one 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 divided by payments per year)
• \( n \) — Total number of payments

Explanation: The formula accounts for both principal repayment and interest charges over the life of the loan.

3. Importance of Amortization Calculation

Details: Understanding loan amortization helps borrowers compare loan options, plan finances, and understand how much of each payment goes toward principal vs. interest.

4. Using the Calculator

Tips: Select which variable you want to calculate, then enter the other three known values. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between r and APR?
A: r is the periodic interest rate (APR divided by number of periods per year), while APR is the annual rate.

Q2: How accurate is the interest rate calculation?
A: The iterative method provides close approximation (within 0.0001) but may differ slightly from bank calculations.

Q3: Can I use this for mortgage calculations?
A: Yes, but remember mortgages typically use monthly payments (divide annual rate by 12 and multiply years by 12).

Q4: Why does my calculated payment differ from my actual payment?
A: Lenders may include fees, insurance, or use slightly different rounding methods.

Q5: How can I calculate total interest paid?
A: Multiply the payment amount by number of payments, then subtract the principal.