1. What is Loan Amortization?

Loan amortization is the process of paying off a debt over time through regular payments. Each payment covers both principal and interest, 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 standard amortization 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

Explanation: The formula calculates the fixed monthly payment required to fully amortize a loan over its term, considering compound interest.

3. Importance of Loan Calculation

Details: Understanding your loan payments helps with budgeting, comparing loan offers, and making informed financial decisions about large purchases like homes or cars.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate (as a percentage), and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between interest rate and APR?
A: The interest rate is the cost of borrowing principal, while APR includes additional fees and costs to give a more complete picture of loan cost.

Q2: How can I pay less interest overall?
A: Make extra principal payments when possible, choose a shorter loan term, or negotiate a lower interest rate.

Q3: Why does most of my early payment go toward interest?
A: With amortizing loans, interest is calculated on the outstanding balance, which is highest at the beginning of the loan term.

Q4: What's the impact of a larger down payment?
A: A larger down payment reduces the principal amount, resulting in lower monthly payments and less total interest paid.

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