Loan Amortization Calculator

What Is Loan Amortization?

Loan amortization is the process of paying down a loan through regular scheduled payments over time. Each payment consists of two components: interest on the outstanding balance and principal reduction. In the early months of a loan, the majority of each payment goes toward interest. As the balance declines, the interest portion shrinks and the principal portion grows — even though the total payment stays the same.

Understanding how your loans amortize gives you a clearer picture of your true debt obligations, helps you evaluate refinancing decisions, and lets you see the real cost of borrowing — not just the monthly payment.

Standard vs. Balloon Amortization

Most business loans fall into one of two structures:

A fully amortizing loan pays off completely over its term. Every payment reduces the principal balance, and at the end of the loan term the balance reaches zero. Equipment loans and most SBA term loans are fully amortizing.

A balloon loan amortizes on a longer schedule — say 20 years — but the full remaining balance becomes due at a specific point, typically 5 to 7 years. The monthly payments are calculated as if the loan will run for 20 years, keeping them lower, but the borrower must either pay off or refinance the remaining balance when the balloon comes due. Commercial real estate loans and some equipment financing are frequently structured this way.

Balloon loans offer lower monthly payments in the short term but create refinancing risk. If market conditions change, the business has grown weaker, or credit markets tighten, refinancing the balloon may be difficult or expensive. Contractors who take balloon loans need to plan well in advance for the payoff or refinance.

Day Count Conventions

Not all lenders calculate interest the same way. The day count convention determines how many days are assumed to be in a month and a year for interest calculation purposes. The difference is small on any single payment but adds up over the life of a loan.

Actual/365 calculates interest based on the actual number of days elapsed divided by 365. This is the most common convention for consumer loans, SBA loans, and most commercial term loans. A stated rate of 7.5% under Actual/365 produces an effective rate of exactly 7.5%.

Actual/360 divides by 360 instead of 365, which means you are charged for actual days but against a shorter assumed year. Because the denominator is smaller, the effective interest rate is slightly higher than the stated rate. A stated 7.5% rate on an Actual/360 basis produces an effective annual rate of approximately 7.604%. This convention is common in commercial real estate loans, lines of credit, and some commercial equipment financing.

30/360 assumes every month has exactly 30 days and the year has 360 days. This simplifies calculation and is common in commercial real estate and bond markets. It slightly overcharges in 31-day months and undercharges in February, but the differences wash out over a full year for most purposes.

For most equipment loans and term loans in the $3M to $30M contractor range, Actual/365 is the standard. If your loan documents reference Actual/360 or 30/360, use that selection in the calculator to get the most accurate payment figures.

The Formula

Monthly payment = P x (r(1+r)^n) / ((1+r)^n - 1)

Where: P = loan principal r = monthly interest rate adjusted for day count convention n = number of monthly payments

For a balloon loan, the monthly payment is calculated using the full amortization period, but the balloon balance is calculated as the remaining principal at the balloon date.

A Worked Example — Fully Amortizing

A roofing contractor finances $350,000 in equipment at 7.5% interest over 60 months using Actual/365.

Monthly rate: 7.5% / 12 = 0.625% Monthly payment: $7,003 Total paid over 60 months: $420,180 Total interest paid: $70,180

At month 12, the outstanding balance is approximately $294,000. At month 24, approximately $233,000. By month 48, the balance has dropped to approximately $95,000 — meaning the majority of principal reduction happens in the back half of the loan.

A Worked Example — Balloon Loan

The same contractor finances $350,000 at 7.5% interest, amortized over 240 months (20 years) with a balloon due at 84 months (7 years).

Monthly payment: $2,805 — significantly lower than the fully amortizing option Total paid over 84 months: $235,620 Balloon balance due at month 84: approximately $318,000

The contractor has paid $235,620 over 7 years but still owes $318,000. The lower monthly payment came at the cost of a large future obligation. Whether that trade-off makes sense depends on the contractor's cash flow needs, their ability to refinance at maturity, and their plans for the asset being financed.

Interest-Only Periods

Some loans — particularly SBA loans and construction loans — include an initial interest-only period before principal payments begin. During this period, payments are lower but the balance does not decrease. The full principal amortization then occurs over the remaining term, resulting in higher payments than a loan that started amortizing from day one.

If your loan has an interest-only period, factor that into your cash flow planning. The payment increase when principal amortization begins can be significant.

Early Payoff and Prepayment

Paying additional principal reduces your outstanding balance and shortens the loan term. On a 60-month loan at 7.5%, an extra $500 per month applied to principal from the beginning reduces the loan term by approximately 10 months and saves several thousand dollars in interest.

Before making extra principal payments, confirm whether your loan has a prepayment penalty. Some commercial lenders include prepayment provisions — particularly on longer-term loans and real estate financing — that charge a fee for early payoff.

What the Calculator Shows

The calculator below generates a full amortization schedule for both a standard fully amortizing loan and a balloon loan using the same inputs. You can compare the monthly payment, total interest cost, and remaining balance at any point in the loan term. Select your day count convention to match your loan documents for the most accurate results.