1. What Is The Amortization Formula?

The amortization formula calculates the fixed monthly payment required to pay off a loan over a specified period, including both principal and interest components.

2. How Does The Calculator Work?

The calculator uses the amortization formula:

Where:

• \( P \) — Principal loan amount (USD)
• \( r \) — Monthly interest rate (decimal)
• \( n \) — Total number of payments (months)

Explanation: This formula distributes the loan repayment into equal monthly installments, with the interest portion decreasing and principal portion increasing over time.

3. Importance Of Loan Amortization

Details: Understanding loan amortization helps borrowers plan their finances, compare different loan options, and understand how much of each payment goes toward interest versus principal reduction.

4. Using The Calculator

Tips: Enter the principal amount in USD, annual interest rate as a percentage, and the loan term in months. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is 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 monthly payments?
A: Longer loan terms result in lower monthly payments but higher total interest paid over the life of the loan.

Q3: Can I make extra payments to reduce the loan term?
A: Yes, additional payments applied to principal can reduce the overall loan term and total interest paid.

Q4: What is an amortization schedule?
A: A table showing the breakdown of each payment into principal and interest components over the life of the loan.

Q5: Are there different types of amortization?
A: Yes, while this calculator uses fixed-rate amortization, there are also variable-rate and interest-only amortization methods.