Loan Amortization Calculation Example, Illustration, Concepts, Sample Help Online

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Meaning of Amortization

Amortization in accounts refers to a process of writing off. Amortizing a loan means payment of the principal of loan within a time period in such a manner that the loan balance is completely paid off at the end of the time period. The amount paid includes a portion of interest and a portion of principal. In amortization of loan the cost of interest in the beginning period is higher. The formula for calculating the amortization of loan is as follows

A= P (r(1+r) n / (1+r) n-1)

where
A is the amount to be paid per period
P is initial Principal (loan amount)
r = interest rate per period
n = total number of payments or periods

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Loan Amortization Calculation Example Explanation

The concept can be better understood with help of an example.
Example: with the help of given information let’s calculate the payment amount

P = $20,000
r = 7.5% per year / 12 months = 0.625% per period
n = 5 years x 12 months = 60 total periods
A= P (r(1+r) n / (1+r) n-1) putting the values we the payment amount as $400.76

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Summary