The Complete Guide to Loan Amortization & Interest Calculations

Amortization represents the scheduled repayment of a loan through regular installments over time. In a standard amortized loan, every periodic installment is split into two components: interest charges and principal reduction. During the early phase of a loan term, the remaining balance is at its highest, meaning the overwhelming portion of your monthly payment goes toward satisfying accrued interest. As the principal is progressively paid down, interest charges diminish, and an increasingly larger share of each subsequent payment is applied directly against the outstanding debt balance.

Borrowers in Southeast Asia and Cambodia frequently encounter two fundamentally different methods of calculating interest: 1. Reducing Balance Method (Declining Balance): Interest is calculated solely on the remaining unpaid principal at each compounding cycle. As you repay principal, your monthly interest cost drops correspondingly. This is the mandatory standard enforced by the National Bank of Cambodia (NBC) for commercial banks and microfinance institutions (MFIs). 2. Flat Rate Method: Interest is calculated against the original borrowed principal across the entire tenure, regardless of how much principal has already been repaid. A nominal 10% flat rate loan actually translates to an effective annual percentage rate (APR) of roughly 18% to 19% on a reducing basis—nearly double the advertised number.

The universal mathematical formula for calculating a fixed monthly payment (PMT) on a fully amortized loan is: PMT = P * [r(1 + r)^n] / [(1 + r)^n - 1] Where: • P = Initial Principal loan amount (e.g., $10,000 USD or 40,000,000 KHR) • r = Periodic interest rate (annual interest rate divided by 12 months) • n = Total number of monthly payment periods (e.g., a 5-year loan = 60 periods) KhmerTools' Loan Calculator implements this exact formula with double-precision IEEE 754 arithmetic, generating accurate full monthly amortization schedules with principal/interest breakdowns down to the cent.

Because interest on reducing balance loans accrues daily or monthly against the active balance, paying even a small extra lump sum directly toward principal delivers massive cumulative savings. By immediately shrinking the balance upon which future interest is calculated, you both shorten the effective loan duration and avoid thousands of dollars in lifetime financing fees.