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The amortization rate of a loan is the fixed amount paid in each payment period to fully repay the loan by the end of its term. Most loans use the annuity principle of amortization. This means that the size of each installment remains constant, but the distribution between interest and capital changes over time.

At the beginning of repayment, mainly interest is paid, while as the end of the term approaches, mainly capital is repaid. This calculator allows you to calculate the amortization rate of a loan if certain conditions are known or vice versa. If you leave one of the following values (amortization rate, loan amount, interest rate or term) blank and enter the other three values, the tool will calculate the missing value.

Method of calculating amortization rate

The fixed amortization rate is determined by three factors: the loan amount, interest rate and term. The higher the loan amount, the higher the amortization rate will be. If the term is extended, each payment will decrease in size but because the interest is paid over a longer period of time, the total cost increases. The higher the interest rate, the higher both the amortization rate and the overall cost will be. This amortization rate is calculated so that the sum of all equal payments discounted at the loan's interest rate equals exactly the current loan amount.

Calculation equation for amortization

In an annuity fixed rate loan, each installment is as follows:

M is the amount of each payment, P is the loan amount, i is the interest rate per period and n is the total number of payments. The interest rate per period is found by dividing the annual interest rate by the number of payments made in a year, and n is the product of the number of years and the same number of payments. For a monthly payment loan, divide the annual interest rate by 12 and multiply the length of time in years by 12. As an example, consider a $25,000 loan with a 7 percent interest rate, a term of 5 years, and monthly payments.

So the monthly rate is approximately $495.03. You will pay a total of $29,701 over 60 months, of which 4,701.80 is interest. The following table shows what each s$495.03. You will pay a total of$

Fixed term and fixed installments

There are two ways to look at a loan and this calculator can handle both without you having to switch modes. In the Fixed Term mode, you set how long you want the loan to last, such as 15 years or 30 years, and it calculates what monthly payment is required to pay off the loan within that time frame. If you leave the monthly payment blank, the calculator will fill in the result. In the Fixed Payment mode, you set how much you can afford to pay each month, and it calculates how long it will take to pay off the loan. If you enter a monthly payment and leave the term blank, the calculator will calculate the number of years. This method is good for credit cards or loans where you want to make higher payments. You can increase the monthly payment and see how that affects the length of time it takes to pay off the loan.

Interest Rate vs. APR

The interest rate you enter is important. The interest rate is the direct cost of borrowing money. The annual percentage rate (APR) gives a more comprehensive figure. It includes fees, points and other costs spread over the life of the loan, so it's usually slightly higher than the interest rate. If there are no fees on the loan, they're both the same. Entering the interest rate allows you to check the terms of the actual loan. Entering the APR takes into account additional costs. For larger loans with longer terms, such as mortgages, these differences can add up and make a significant difference.

Why are the first payments mostly used for interest?

Interest is calculated on the remaining balance outstanding. At the start of repayment this balance will be almost equal to the total loan amount so a large proportion of each payment goes towards interest and only a small portion goes towards reducing the principal. As the balance reduces, so does the interest charged, allowing a larger proportion of the fixed monthly payment to go towards reducing the capital. The following amortisation schedule and graph show this change. In the early years the loan balance falls slowly but as you get closer to the end of the term the rate of fall accelerates. So by paying slightly more at the start you can save more interest than if you made the same extra payment later on.