1. What is Loan Amortization?

Amortization is the process of spreading out a loan into a series of fixed payments over time. Each payment goes toward 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:

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

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

3. Importance of Amortization Calculation

Details: Understanding amortization helps borrowers see the true cost of a loan, plan their finances, and make informed decisions about loan terms and refinancing options.

4. Using the Calculator

Tips: Enter the principal amount in USD, annual interest rate as a percentage (e.g., 4.5 for 4.5%), and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How does the interest rate affect my payment?
A: Higher interest rates increase both your monthly payment and the total interest paid over the life of the loan.

Q2: What's the difference between term and amortization period?
A: They're often the same, but some loans may have a shorter term than amortization period (like balloon payments).

Q3: How can I pay less interest overall?
A: Make additional principal payments when possible, choose a shorter loan term, or secure a lower interest rate.

Q4: Why does most of my early payment go toward interest?
A: With amortization, interest is calculated on the outstanding balance, which is highest at the beginning of the loan.

Q5: Can I use this for other types of loans?
A: Yes, this works for any fixed-rate amortizing loan (mortgages, car loans, personal loans), but not for credit cards or interest-only loans.