Loan repayment methods: equal payment vs equal principal
When you take out a loan, the repayment method changes how much you pay each month and how much interest you pay in total. Here is how the most common methods differ, with a simple way to compare them.
Equal payment (annuity)
With the equal-payment method, every monthly payment is exactly the same for the whole term. Early on, most of each payment is interest; later, more goes to the principal. It is the most common method because the fixed payment is easy to budget, but you pay slightly more total interest than with equal principal.
Equal principal and other methods
With equal principal, you repay the same slice of the principal each month, so the interest — and the total payment — falls over time. The first payments are higher, but you pay less interest overall. Graduated repayment starts low and rises each month, while interest-only pays just the interest until a final lump sum repays the whole principal.
Compare the total cost, not just the monthly figure
A longer term lowers each monthly payment but means interest accrues for more months, so the total cost is higher. The interest rate you are quoted is usually annual; the real cost also depends on fees, which is why APR is better for comparing offers. Before signing, run the numbers for each method so you can see the trade-off between an affordable payment and the lowest total interest.
Try it: compare repayment methods with the free CalcBloom loan calculator →