1. What is Amortization?

Amortization refers to the process of gradually paying off a debt through regular payments that cover both principal and interest. In a promissory note, each payment is divided between interest and principal reduction.

2. How Does the Calculator Work?

The calculator uses the basic amortization formula:

Where:

• \( Payment \) — Total payment amount (USD)
• \( Interest \) — Interest portion of the payment (USD)

Explanation: The formula calculates how much of your payment goes toward reducing the principal balance after accounting for the interest due.

3. Importance of Amortization Calculation

Details: Understanding amortization helps borrowers see how much of each payment reduces their principal balance versus how much goes to interest. This is crucial for financial planning and debt management.

4. Using the Calculator

Tips: Enter the total payment amount and the interest portion in USD. Both values must be positive numbers, with payment greater than interest.

5. Frequently Asked Questions (FAQ)

Q1: Why is my amortization amount lower than my payment?
A: Part of each payment goes toward interest, so only the remaining portion (amortization) reduces your principal balance.

Q2: How does amortization change over time?
A: In a standard amortizing loan, the interest portion decreases with each payment while the principal portion increases.

Q3: What's the difference between amortization and depreciation?
A: Amortization applies to paying off debt, while depreciation refers to spreading out the cost of an asset over its useful life.

Q4: Can I calculate amortization for any type of loan?
A: This basic calculation works for any amortizing loan, though more complex loans may require additional factors.

Q5: How can I reduce total interest paid?
A: Making larger payments or paying more frequently can reduce total interest by accelerating principal reduction.