1. What is the Loan Payment Formula?

The loan payment formula calculates the fixed monthly payment required to fully repay a loan over its term, including both principal and interest.

2. How Does the Calculator Work?

The calculator uses the PMT formula:

Where:

• \( P \) — Principal loan amount (USD)
• \( r \) — Monthly interest rate (annual rate ÷ 12)
• \( n \) — Number of monthly payments (term in years × 12)
• \( PMT \) — Fixed monthly payment (USD)

Explanation: The formula accounts for compound interest over the life of the loan, calculating equal payments that cover both principal and interest.

3. Importance of Amortization

Details: An amortization schedule shows how each payment is split between principal and interest, helping borrowers understand the true cost of the loan and how equity builds over time.

4. Using the Calculator

Tips: Enter the principal amount in USD, annual interest rate as a percentage (e.g., 5.25), and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why does most of my early payment go toward interest?
A: This is how amortization works - early payments have more interest because the outstanding balance is higher. The interest portion decreases with each payment.

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 APR and interest rate?
A: APR includes both interest rate and loan fees, giving a more complete picture of borrowing costs.

Q4: Are there loans with different payment structures?
A: Yes, some loans have interest-only periods or balloon payments, but fixed-rate fully amortizing loans are most common.

Q5: How does refinancing affect amortization?
A: Refinancing resets the amortization schedule, typically extending the loan term unless you refinance to a shorter term.