What is Loan Amortization?
Loan amortization is the process of paying a debt through a series of scheduled payments. Each payment is divided between interest and principal. For a typical fixed-rate loan, the interest portion tends to be larger at the beginning and decreases as the outstanding balance falls.
Amortization Formula
For a fixed-rate loan, the periodic payment can be calculated from the principal, periodic interest rate, and number of payments. If the periodic rate is \(r\), principal is \(P\), and there are \(n\) payments, the payment is \(P r(1+r)^n / ((1+r)^n-1)\) when \(r\neq0\).
Extra Payments
Additional principal payments can shorten the repayment period and reduce total interest. The result assumes the extra amount is applied directly to principal at each payment period. Lender policies and prepayment penalties may differ.