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Amortization Formula:
Where:
P = Principal loan amount
r = Monthly interest rate (annual rate ÷ 12)
n = Number of payments (loan term in months)
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Loan amortization is the process of paying off a debt (like a car loan) over time through regular payments. Each payment covers both principal (the original loan amount) and interest (the cost of borrowing). Early payments consist mostly of interest, while later payments apply more to the principal.
The calculator uses the standard amortization formula:
Where:
Explanation: The formula calculates a fixed monthly payment that pays off the loan plus interest over the specified term.
Details: The schedule shows how each payment is split between principal and interest, and how the loan balance decreases over time. Early in the loan, most of your payment goes toward interest. As the principal decreases, more of each payment goes toward paying down the balance.
Tips: Enter the total loan amount, annual interest rate (APR), and loan term in years. The calculator will show your monthly payment, total interest cost, and a detailed payment-by-payment breakdown.
Q1: Why does most of my early payment go toward interest?
A: This is how amortization works - interest is calculated on the outstanding balance, which is highest at the beginning of the loan.
Q2: How can I pay less interest overall?
A: You can pay less interest by getting a lower interest rate, choosing a shorter loan term, or making extra principal payments.
Q3: What happens if I make extra payments?
A: Extra payments directly reduce the principal, which reduces future interest charges and may allow you to pay off the loan early.
Q4: Are there prepayment penalties?
A: Some loans have prepayment penalties - check your loan agreement. Most auto loans don't have prepayment penalties.
Q5: Should I choose a longer term for lower payments?
A: While longer terms reduce monthly payments, you'll pay more interest overall. Choose the shortest term you can comfortably afford.