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Amortization Formula:
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The amortization formula calculates fixed monthly payments for loans, accounting for both principal and interest. It ensures each payment reduces the loan balance while covering interest charges, providing a consistent payment schedule throughout the loan term.
The calculator uses the standard amortization formula:
Where:
Explanation: The formula calculates the fixed monthly payment required to fully amortize a loan over its term, with each payment covering both interest and principal reduction.
Details: Accurate payment calculation is essential for budgeting, loan comparison, and financial planning. It helps borrowers understand the true cost of borrowing and make informed decisions about loan affordability.
Tips: Enter the principal amount in dollars, annual interest rate as a percentage, and loan term in years. All values must be positive numbers with principal > 0 and loan term between 1-50 years.
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, calculated as a percentage of the remaining principal.
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. Shorter terms have higher payments but less total interest.
Q3: What is an amortization schedule?
A: An amortization schedule is a table showing the breakdown of each payment into principal and interest components, and the remaining balance after each payment.
Q4: Can I pay off my loan early?
A: Most loans allow early repayment, but some may have prepayment penalties. Early payment reduces total interest paid and shortens the loan term.
Q5: How does interest rate affect my payment?
A: Higher interest rates increase both monthly payments and total interest paid. Even small rate differences can significantly impact the total cost of the loan.