1. What is the Amortization Formula?

The amortization formula calculates fixed monthly payments for a loan that include both principal and interest. It ensures the loan is paid off completely by the end of the term.

2. How Does the Calculator Work?

The calculator uses the amortization formula:

Where:

• \( Loan\ Amount \) — Total amount borrowed
• \( Interest\ Rate \) — Annual interest rate (in decimal form)
• \( Loan\ Term \) — Duration of loan in months

Explanation: The formula accounts for compound interest over the life of the loan, calculating what fixed payment would pay off the loan in the specified term.

3. Understanding Car Loan Payments

Details: Car loans are typically amortizing loans where early payments consist mostly of interest, with the principal portion increasing over time. The monthly payment remains constant, but the interest/principal breakdown changes each month.

4. Using the Calculator

Tips:

• Enter loan amount in dollars (without commas)
• Enter interest rate as decimal (5% = 0.05)
• Loan term should be in months (e.g., 60 months = 5 years)
• All values must be positive numbers

5. Frequently Asked Questions (FAQ)

Q1: Why is my monthly payment higher than expected?
A: Higher rates, longer terms, or additional fees can increase payments. Always check the annual percentage rate (APR) which includes fees.

Q2: How does loan term affect payments?
A: Longer terms reduce monthly payments but increase total interest paid. Shorter terms have higher payments but lower total cost.

Q3: What's the difference between interest rate and APR?
A: The interest rate is the cost of borrowing, while APR includes interest plus fees, giving a more complete cost picture.

Q4: Should I make a down payment?
A: Down payments reduce the loan amount, resulting in lower payments and less interest paid overall. Typically 10-20% is recommended.

Q5: How can I reduce my car loan payments?
A: Consider a larger down payment, shorter loan term (if affordable), shopping for better rates, or choosing a less expensive vehicle.