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 over time while the principal portion increases.

2. How Does the Calculator Work?

The calculator uses the amortization payment formula:

Where:

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

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

3. Importance of Amortization Calculation

Details: Understanding your amortization schedule helps with financial planning, comparing loan offers, and making informed decisions about prepayments or refinancing.

4. Using the Calculator

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

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between principal and interest?
A: Principal is the original loan amount borrowed, while interest is the cost of borrowing that money.

Q2: How does loan term affect payments?
A: Longer terms result in smaller monthly payments but higher total interest costs over the life of the loan.

Q3: What is an amortization schedule?
A: A table showing each payment's allocation between principal and interest, and the remaining balance after each payment.

Q4: Can I pay off my loan early?
A: Yes, but check for prepayment penalties. Extra payments reduce principal and can significantly shorten your loan term.

Q5: How does interest rate affect payments?
A: Higher rates increase both monthly payments and total interest paid. Even small rate differences can have big impacts over time.