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 the amortization formula:

Where:

• \( PMT \) — Yearly payment amount
• \( P \) — Principal loan amount
• \( r \) — Annual interest rate (in decimal)
• \( n \) — Number of years

Explanation: The formula calculates the fixed payment amount required to pay off a loan with interest over a specified term.

3. Understanding the Amortization Formula

Details: The numerator calculates the interest on the current balance, while the denominator accounts for the compounding effect over the loan term. The result gives the periodic payment needed to pay off the loan.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a decimal (e.g., 5% = 0.05), and loan term in years. The calculator will show the yearly payment and a printable amortization schedule.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between principal and interest?
A: Principal is the original loan amount, while interest is the cost of borrowing that money.

Q2: Why does more payment go toward interest early in the loan?
A: Because interest is calculated on the outstanding balance, which is highest at the beginning.

Q3: Can I make extra payments to pay off the loan faster?
A: Yes, extra payments directly reduce the principal, which reduces total interest paid.

Q4: How does interest rate affect payments?
A: Higher rates increase payments and total interest paid over the life of the loan.

Q5: What's the advantage of a shorter loan term?
A: Shorter terms mean higher payments but less total interest paid and faster equity building.