1. What is Loan Amortization?

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

2. How Does the Calculator Work?

The calculator uses the standard loan payment formula:

Where:

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

Example Schedule: For a $200,000 loan at 4% interest for 30 years:

• First payment: $954.83 (of which $288.16 is principal)
• Middle payment: $954.83 (of which $475.07 is principal)
• Final payment: $954.83 (of which $952.33 is principal)

3. Importance of Amortization

Details: Understanding amortization helps borrowers see how much interest they'll pay over the loan term and how extra payments can reduce total interest and shorten the loan term.

4. Using the Calculator

Tips: Enter the loan amount, annual interest rate (as a percentage), and loan term in years. The calculator will show your monthly payment and total interest costs.

5. Frequently Asked Questions (FAQ)

Q1: How does a longer loan term affect payments?
A: Longer terms reduce monthly payments but increase total interest paid over the life of the loan.

Q2: What happens if I make extra payments?
A: Extra payments reduce the principal faster, saving interest and potentially shortening the loan term.

Q3: What's the difference between interest rate and APR?
A: APR includes both interest rate and other loan fees, giving a more complete cost picture.

Q4: Why does early payment go mostly to interest?
A: Interest is calculated on the outstanding balance, which is highest at the beginning of the loan.

Q5: Are there loans that don't amortize?
A: Yes, interest-only loans and balloon loans have different payment structures.