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Loan Amortization Formula:
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Loan amortization is the process of paying off a debt over time through regular payments. Each payment covers both interest charges and principal repayment, with the interest portion decreasing and principal portion increasing over the loan term.
The calculator uses the standard amortization formula:
Where:
Explanation: This formula calculates the fixed monthly payment required to fully repay a loan over its term, accounting for both principal and interest.
Details: The amortization schedule shows how each payment is allocated between interest and principal. Early payments consist mostly of interest, while later payments apply more toward principal reduction.
Tips: Enter the loan amount in CAD, annual interest rate as a percentage, and loan term in years. The calculator will generate your monthly payment and a detailed amortization schedule.
Q1: What is the difference between amortization and term?
A: The term is the length of time you have to repay the loan, while amortization is the process of spreading payments over that term.
Q2: Can I make extra payments to pay off my loan faster?
A: Yes, most Canadian lenders allow extra payments which will reduce your principal balance and shorten your amortization period.
Q3: Are there different types of amortization schedules?
A: The most common is straight-line (equal payments), but some loans may have graduated payments or balloon payments.
Q4: How does compound interest affect my loan?
A: Interest is typically compounded monthly, meaning each month's interest is calculated on the current principal balance.
Q5: What happens if I miss a payment?
A: Missed payments may result in late fees, increased interest costs, and potentially damage to your credit score.