1. What is Loan Amortization?

Loan amortization is the process of paying off a debt over time through regular payments. Each payment covers both interest and principal, with the proportion changing over the loan term.

2. How Does the Calculator Work?

The calculator uses the standard loan amortization formula:

Where:

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

Explanation: This formula calculates the fixed monthly payment required to fully amortize a loan over its term, accounting for both principal and interest.

3. Importance of Loan Amortization

Details: Understanding loan amortization helps borrowers plan their finances, compare loan offers, and understand how much of each payment goes toward principal vs. interest over time.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage, and loan term in years. 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 over time.

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 pay off my loan early?
A: Yes, but check for prepayment penalties. Early payments typically go toward principal, reducing 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 entire loan term.

Q5: Are there different types of amortization?
A: Yes, including straight-line (equal principal payments) and declining balance (common for mortgages and car loans).