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Loan Payment Formula:
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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.
The calculator uses the standard loan amortization formula:
Where:
Explanation: The formula calculates the fixed monthly payment required to fully repay a loan over its term, accounting for compound interest.
Details: Understanding amortization helps borrowers see how much of each payment goes toward interest versus principal, plan for the total cost of borrowing, and evaluate different loan options.
Tips: Enter the loan amount in USD, annual interest rate as a percentage, and loan term in years. All values must be positive numbers.
Q1: Why does most of my early payment go toward interest?
A: In the beginning, your balance is highest, so the interest calculated on that balance is largest. As you pay down principal, the interest portion decreases.
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: What's the difference between simple and amortized loans?
A: Simple loans charge interest only on the original principal, while amortized loans charge interest on the remaining balance, which decreases over time.
Q4: Why does my calculated payment differ slightly from my actual payment?
A: Lenders may include fees, use slightly different rounding methods, or calculate interest differently (e.g., daily vs. monthly).
Q5: How does changing the loan term affect my payment?
A: Shorter terms mean higher monthly payments but less total interest. Longer terms reduce monthly payments but increase total interest paid.