You have been approved for a $200,000 loan at 6% for 30 years. The bank tells you the monthly payment is $1,199.10, and you wonder: how much of that is actually paying down the loan, and how much is just interest? Early on, the answer is sobering. Amortization is the schedule that splits every payment into interest and principal, and this calculator builds it for you from three numbers.
The equation it uses
Formula: M = P[r(1+r)^n] / [(1+r)^n - 1]
P is the loan principal, the amount borrowed. r is the interest rate per payment period, so for monthly payments you divide the annual rate by 12. n is the total number of payments, 360 for a 30-year monthly loan. The top of the fraction scales the principal by the period rate and the compounding factor; the bottom normalizes it so the result is the fixed payment M that pays the loan off exactly after n payments. The formula applies to fixed-rate loans with equal periodic payments and no extra charges mid-term.
How to use the calculator
- Enter the loan amount (principal).
- Enter the annual interest rate; the calculator converts it to a monthly rate.
- Enter the loan term in years.
- Read the monthly payment, then the schedule showing each payment's interest and principal split.
- Check the totals: amount paid overall and total interest.
Worked example, step by step
Borrow $200,000 at 6% annual for 30 years, monthly payments. Step one: r = 0.06 / 12 = 0.005, n = 360. Step two: compute 1.005^360 = 6.022575. Step three: plug in, M = 200,000 x [0.005 x 6.022575] / [6.022575 - 1] = 200,000 x 0.0301129 / 5.022575 = 200,000 x 0.0059955 = $1,199.10 per month. Step four: the first payment's interest is 200,000 x 0.005 = $1,000.00, so only $199.10 touches the principal, leaving a balance of $199,800.90. Over the full term you pay $1,199.10 x 360 = $431,676, of which $231,676 is interest. That front-loaded interest is the key insight an amortization schedule gives you.
Practical uses
Mortgages and car loans are the obvious cases, but the schedule is also how you evaluate paying extra. An additional $100 a month against principal shortens the term and cuts total interest, and you can see exactly by how much. Comparing a 15-year and a 30-year term side by side makes the trade-off concrete: higher payment, far less interest. To compare loan offers on cost rather than payment, run the APY calculator on their rates, and when a lender quotes APR, the APR to APY converter shows what compounding does to it.
Common mistakes
- Using the annual rate directly. For monthly payments r must be the annual rate divided by 12. Using 0.06 instead of 0.005 produces a wildly wrong payment.
- Counting n in years. A 30-year loan paid monthly has n = 360, not 30. This is the single most common error.
- Ignoring extra payments. The formula assumes identical payments. Any extra principal payment changes the schedule, usually in your favor.
An honest note on limits
The formula covers fixed-rate, fixed-payment loans only. Adjustable rates, balloon payments, interest-only periods, taxes, insurance, and fees all sit outside it, so a mortgage's real monthly outlay is higher than the P and I figure here. Treat results as planning estimates, not financial advice.