An amortization calculator is a tool used to calculate the amount of payment, the loan amount or term in years based on either quarterly, monthly, annual, or semi-annual payment structures. Amortization calculators help users to calculate an amortization schedule for a loan.
Amortization is a term used in accounting to refer to the process of allocating the cost of an intangible asset over a specific time frame. It can be said to be the process of settling debt such as a car loan or a mortgage loan, using a fixed repayment schedule in consistent instalments over a particular time frame.
Amortization involves spreading out capital expenses for intangible assets over a timeframe, which would normally be the duration of the asset’s life, for tax and accounting purposes. Various intangible assets will be amortized over various lengths of time but as a rule of thumb, an asset will be amortized over the term of its useful life, or the maturity or loan period if it is a loan or a bond. When a business amortizes an expense, it helps to connect the revenues that the asset generates to its cost. Amortization is similar to depletion which applies to natural resources and depreciation which applies to tangible assets.
An amortization schedule shows the amount of interest and the amount of principal tied with each payment until the loan is completely paid off upon reaching its term. It presents this information in the form of a full table of periodic loan payments. The majority of each payment early in the schedule covers the loan’s interest while the majority of each payment later in the schedule is the loan’s principal. The borrower’s total principal payments and total interest for the entire loan term is shown in the last line of the schedule.
The fraction of each payment that ends up going into the principal increases a bit in an amortization schedule. Likewise, the fraction of each payment that ends up going into interest reduces a bit with each payment.
Tools such as a mortgage calculators are often used alongside an amortization schedule when a borrower is looking to take out a loan and needs to estimate their total mortgage costs.
An amortization calculator may be used for any number of reasons, for instance, to make adjustments to the amount of the loan such that the monthly payments comfortably fit into one’s budget. The interest rates can be varied as well in order to determine the difference more convenience rates would make in the sort of car or house one will be better able to pay for. The calculator may also be used to show the amount that ends up going into the principal and the exact amount that ends up going into the interest for each payment.
An amortization calculator is an important tool for creating amortization schedules, and amortization schedules are crucial due to the fixed low payments which make it easier for borrowers to eventually pay off the loan. Amortization calculators remain in use because they provide an easy way to calculate payments and prepare an amortization schedule.
The person most likely to use an online amortization calculator is a borrower who needs a clear picture of his or her loan repayment plan. Such a person does not need to have prior knowledge of complicated methods of arriving at a proper amortization schedule.
Using an online amortization calculator is as easy as entering the relevant values for a loan. Different amortization calculators will vary in terms of the specific values that must be entered. Some will include fields such as interest rates and payment type, where it will be specified whether the payment is monthly or quarterly as the case may be. Some calculators will include a specific number of input parameters all of which may not be compulsory to fill, such as term years, payment amount, or loan amount. Once the requisite values are entered, the user will be required to click on a button which may be labelled “calculate”, in order to calculate their payment and produce an amortization table which may then be printed.
Some online amortization calculators go beyond estimating loan repayments and also generate a comprehensive explanation detailing how to create an amortization schedule.
Some online amortization calculators will make it clear that they are not precise tools that should be relied upon 100%. This is so because they recognize that the maturity of an existing loan term may be impacted by a number of factors such as loan servicing, an existing balloon, early payment, the initial payment dates, among others. Users may be reminded that their using the calculators is at their own risk as there are no warranties or representations with respect to such calculators.
Lenders and borrowers would normally use amortization schedules in cases involving a car loan or a mortgage loan where the parties involved already know the payoff dates for the instalment loans at the time the loan is taken out. When the total periodic payments of the term of the loan are known, one may turn to another method to calculate an amortization schedule without using an online amortization calculator.
In one method, the loan balance is multiplied by the periodic interest rate, producing the interest amount of the payment for the first month. This amount is then subtracted from the periodic payment to arrive at the fraction of the loan payment allotted to the principal of the loans balance. For the following month’s principal payments and interest, the principal payment made in the first month is subtracted from the loan balance to arrive at a new balance. The previous steps are then repeated to calculate the fraction of the second payment allotted to the principal and interest. The steps are repeated until a full amortization schedule is prepared for the life of the loan.
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