1. What is Loan Amortization?

Loan amortization is the process of paying off a debt over time through regular payments. An amortization schedule shows how each payment is split between principal and interest, and how the loan balance decreases over time.

2. How Does the Calculator Work?

The calculator uses the standard amortization formula:

Where:

• \( PMT \) — Monthly payment amount
• \( P \) — Principal loan amount
• \( r \) — Monthly interest rate (annual rate divided by 12)
• \( n \) — Number of payments (loan term in months)

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

3. Importance of Extra Payments

Details: Making extra payments or a lump sum payment reduces the principal balance faster, which decreases the total interest paid and can significantly shorten the loan term.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate, and loan term in years. Optionally add extra monthly payments and/or a one-time lump sum payment to see how they affect your amortization schedule.

5. Frequently Asked Questions (FAQ)

Q1: How do extra payments affect my loan?
A: Extra payments are applied directly to principal, reducing both the total interest paid and the loan term.

Q2: Is a lump sum payment better than extra monthly payments?
A: A lump sum payment has an immediate impact on principal, while extra monthly payments provide ongoing reduction. Both are effective strategies.

Q3: How does interest rate affect my payments?
A: Higher rates increase both your monthly payment and total interest paid. Even small rate differences can have significant long-term effects.

Q4: Can I pay off my loan early?
A: Yes, with sufficient extra payments. Check your loan agreement for any prepayment penalties.

Q5: Why does most of my early payment go to interest?
A: This is normal in amortizing loans. As your principal decreases, more of each payment goes toward principal.