Loan Amortization Calculator

Loan Amortization Formula:

\[ PMT = PV \times \frac{r}{1 - (1 + r)^{-n}} \]

Monthly Payment (PMT):

Total Payment:

Total Interest:

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1. What is Loan Amortization?

Loan amortization is the process of spreading out a loan into a series of fixed payments over time. Each payment consists of both principal and interest, with the interest portion decreasing and the principal portion increasing over the life of the loan.

2. How Does the Calculator Work?

The calculator uses the loan amortization formula:

\[ PMT = PV \times \frac{r}{1 - (1 + r)^{-n}} \]

Where:

\( PMT \) — Monthly payment amount (USD)
\( PV \) — Present value or principal amount (USD)
\( r \) — Monthly interest rate (decimal)
\( n \) — Total number of payments (months)

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

3. Importance of Loan Amortization

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

4. Using the Calculator

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

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between interest rate and APR?
A: The interest rate is the cost of borrowing the principal, while APR (Annual Percentage Rate) includes the interest rate plus other loan fees.

Q2: How can I pay less interest on my loan?
A: You can pay less interest by choosing a shorter loan term, making extra principal payments, or securing a lower interest rate.

Q3: Why does most of my early payment go toward interest?
A: In the early stages of a loan, the outstanding balance is highest, so the interest portion of the payment is larger.

Q4: What is an amortization schedule?
A: An amortization schedule is a table showing each payment's allocation between principal and interest, and the remaining balance after each payment.

Q5: Can I use this for different payment frequencies?
A: This calculator assumes monthly payments. For biweekly or other frequencies, adjustments to the rate and term would be needed.