3 Easy Ways to Calculate Amortization
Photo by Mikhail Nilov on Pexels
Understanding amortization helps simplify loan management by breaking down each payment into interest and principal, showing how your balance decreases over time. This makes budgeting easier and helps you track progress on loans like mortgages, car loans, or student loans. Here are three simple ways to calculate amortization.
Use the Amortization Formula
One way to calculate your monthly loan payment is by using this formula: M = (L * i) / (1 – (1 + i)^-t), where M is the monthly payment, L is the loan amount, i is the monthly interest rate (yearly rate divided by 12 months), and t is the total number of payments in months.
For example, if you borrow $150,000 at a 5% annual rate for 20 years, first divide 5% by 12 to get a monthly rate of 0.004167, and then multiply 20 years by 12 for a term of 240 months. Using these values in the formula will give you the monthly payment needed to repay the loan in 20 years.
Here’s the formula to give you an overview:
Use Excel Functions
The second option is to use Excel. This tool has built-in functions that let you automate the process. You can use the PMT function to find the total monthly payment by entering your monthly rate, loan term, and loan amount. Excel also has PPMT and IPMT functions that break down each payment into principal and interest, allowing you build an amortization schedule.
Here’s how to amortize a loan in less than a minute:
Online Amortization Calculators
The third method is using online amortization calculators, which is convenient if you want results. Websites like Green House Mortgage or Investopedia provide free tools to input your loan details, such as amount, interest rate, and term length. These calculators give you an instant breakdown of your monthly payments and even generate a full payment schedule over the loan period.
Here’s an Online Amortization Calculator that you can use:
In summary, calculating amortization is simpler than it seems. By using the formula, Excel, or an online calculator, you can gain a better understanding of your loan payments and manage your finances more effectively.
