what is an amortization calculator?

An amortization calculator is a powerful financial tool that helps individuals determine an estimated repayment schedule for a loan. It is a mathematical equation used to estimate the total amount of interest and principal that is repaid for a loan over a specific period of time such as a month or a year.

While most lenders will provide an amortization schedule as part of the loan documentation, an amortization calculator can be a useful tool for prospective borrowers. With the calculator, borrowers can estimate how monthly payments may vary depending on interest rate, loan terms, and other factors.

Using an amortization calculator is relatively easy, although it requires inputting multiple variables. For starters, an individual would need to know the total loan amount, the interest rate, and the number of payments that will be made. In addition, it is important to note whether the loan is an adjustable or fixed rate loan, as this affects the structure of the repayment schedule.

When these numbers are input, an amortization calculator will typically generate an amortization table. This table provides a breakdown of the payments made, the principal and interest amounts paid, and the interest paid over the life of the loan.

The principal portion of the payment is applied to the loan balance, and the interest portion is paid to the lender. As the principal amount reduces, the interest portion of the payment will decrease, and vice versa. Over time, the loan balance is lowered and the individual's overall debt is reduced.