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 charges and principal repayment, with the interest portion decreasing over time while the principal portion increases.

2. How Does the Calculator Work?

The calculator uses these amortization formulas:

Where:

• \( Interest_k \) — Interest portion of payment in period k
• \( Principal_k \) — Principal portion of payment in period k
• \( Balance_k \) — Remaining balance after period k
• \( r \) — Monthly interest rate (annual rate / 12)
• \( PMT \) — Fixed monthly payment amount

Explanation: The formulas show how each payment is split between interest and principal, and how the loan balance decreases over time.

3. Importance of Amortization

Details: Understanding amortization helps borrowers see how much of each payment goes toward interest versus principal, the total interest cost of the loan, and how extra payments can reduce the loan term.

4. Using the Calculator

Tips: Enter the loan amount, annual interest rate, and loan term in years. The calculator will show the monthly payment and full amortization schedule.

5. Frequently Asked Questions (FAQ)

Q1: How does extra payment affect amortization?
A: Extra payments reduce the principal faster, decreasing total interest paid and potentially shortening the loan term.

Q2: Why is more interest paid early in the loan?
A: Interest is calculated on the outstanding balance, which is highest at the beginning of the loan term.

Q3: What's the difference between simple and amortized loans?
A: Simple loans pay all interest at the end, while amortized loans pay interest and principal with each payment.

Q4: How does loan term affect total interest?
A: Longer terms result in more total interest paid, even if monthly payments are lower.

Q5: Can amortization be used for all loans?
A: Most installment loans (mortgages, car loans) use amortization, but credit cards and lines of credit don't.