The amortization calculator is one of the best ways for both people and companies to get an idea of the interest paid back on the loans. Mortgage, personal loan, auto loan, this calculator divides each payment into principal and interest so you know exactly what to expect in terms of repayment. In this article, we dive into its usage, advantages and features along with examples and tables.
What is an Amortization Calculator?
Amortization calculator: An amortization calculator calculates the loan amount that must be paid each month to repay a loan over a specific term. It shows you a breakdown of each payment, which percentage contributes to interest and which is paid off principal.
How to Use an Amortization Calculator?
- Fill in the amount of loan (principal).
- Specify the annual interest rate.
- Type the amount to be borrowed in years or months.
- Select the pay period (monthly, quarterly, etc.).
- You can click "Calculate" to get the repayment plan.
Advantages of Using It
- Disclosure: Offers an exact timeline of payments so you can plan for your finances.
- Saves Time: Instantly calculates loan repayments without doing the work manually.
- Flexibility: Easily lets you try different loan phrases and rates.
- Financial Awareness: Lets borrowers know the interest rate they will incur for the life of the loan.
How Does Amortization Work?
Amortization splinters the loan’s interest repayment into regular payments. There is some interest and there is some principal on each payment. Eventually the interest portion goes down and principal portion goes up. This is the calculation formula of periodic payment:
PMT = [P × r × (1 + r)^n] / [(1 + r)^n - 1]
- PMT: Periodic Payment
- P: Loan Principal
- r: Periodic Interest Rate
- n: Total Number of Payments
Loan Repayment Example
| Year | Principal Paid (USD) | Interest Paid (USD) | Total Payment (USD) | Remaining Balance (USD) |
|---|---|---|---|---|
| 1 | 8,556.90 | 2,500.00 | 11,056.90 | 41,443.10 |
| 2 | 8,984.40 | 2,072.50 | 11,056.90 | 32,458.70 |
| 3 | 9,443.60 | 1,613.40 | 11,056.90 | 23,015.10 |
| 4 | 9,936.00 | 1,121.00 | 11,056.90 | 13,079.10 |
| 5 | 10,462.10 | 594.00 | 11,056.90 | 0.00 |
Comparison of Amortized Loans with Other Loan Structures
| Loan Type | Repayment Method | Interest Accrual | Flexibility | Use Case |
|---|---|---|---|---|
| Amortized Loan | Equal Periodic Payments | Decreases Over Time | Moderate | Mortgages, Auto Loans |
| Interest-Only Loan | Interest Only During Term | Constant | High | Bridge Loans |
| Balloon Loan | Small Payments, Large Final Payment | Variable | Low | Short-Term Financing |
Benefits of Understanding Amortization
| Benefit | Explanation |
|---|---|
| Financial Clarity | Helps in understanding payment structure and planning finances effectively. |
| Cost Management | Provides insights into the total interest payable over the loan term. |
| Decision-Making | Enables comparison of different loan options based on repayment schedules. |
Principal Loan Policies and Rules / Guidelines.
- Transparency: Lenders must show borrowers the APR.
- Limits to the Loan Term: Banks may allow loan terms at an upper limit for consumer safety reasons.
- Loans with Prepayment Exclusions: Some loans allow you to pay back without penalty and some have limitations.
- Regulations on Interest Rates: The maximum rate of interest is determined by central banks and financial institutions.