Loan Guide: Equal Payment vs Equal Principal
On the same loan at the same rate, equal payment keeps the instalment flat and costs more in total interest; equal principal repays a fixed amount of principal each month, so the instalment falls and total interest is lower, at the price of a heavier start.
When to compute both
Before you sign. An agent usually quotes one monthly figure, but switching the repayment method on the same amount can move the instalment by several hundred a month in the early years, and the total interest by the price of a car. Putting both side by side is how you learn whether your cash flow survives the first stretch.
The second case is early repayment. Whether to shorten the term or cut the instalment, and whether it is worth doing now, depends on where you sit on the repayment curve. Equal payment front-loads interest, so in the early years most of each instalment is interest — exactly when extra principal saves the most.
Filling in the inputs correctly
Enter the nominal annual rate from the contract, for example 3.1 — not the APY, and not a monthly rate you converted yourself. The monthly rate here is the annual rate divided by 12. The term is years times 12, so 30 years is 360 instalments. Get any of the three wrong and the payment is off by a lot while still looking plausible.
To understand the difference, watch how fast principal falls. Equal payment bundles principal and interest into one flat instalment, so interest dominates early and principal falls slowly. Equal principal repays a fixed slice of principal each month and charges interest on what remains, so the instalment declines. At the same rate the total interest is lower only because principal is repaid faster on average.
- Equal payment: flat instalment, easy to budget, interest-heavy early, higher total interest
- Equal principal: declining instalment, heavier start, lower total interest, suits front-loaded cash flow
- Both accrue interest monthly — neither method has a lower rate
- Compare the interest saved against the return you could earn on that money elsewhere
Limits: it computes an instalment, not the full cost
The result excludes arrangement fees, valuation, insurance, guarantee fees and early-repayment penalties, and it excludes tax. A combined provident-fund and commercial loan has to be computed in two parts at two different rates and then added. If your rate floats — linked to a reference rate, for instance — a fixed-rate result only describes today's level.
Real statements also accrue by actual days and round each instalment to the cent, so a small difference from the bank is normal. For budgeting, round the payment up rather than chasing cents. And lower total interest is not automatically the better deal: weigh the opportunity cost of the money and whether early repayment would drain your emergency fund.
FAQ
Which is cheaper, equal payment or equal principal?
It depends on what you mean by cheaper. At the same rate, equal principal costs less in total interest because principal is repaid faster, but the early instalments are higher. Equal payment is flat and easier early on, and costs more overall. If your money reliably earns more than the loan rate, keeping the difference invested can win; if it just sits there, equal principal usually saves more.
Should early repayment shorten the term or lower the payment?
Shortening the term saves more interest because the interest-bearing period shrinks. Lowering the payment improves monthly cash flow but cuts total interest less. Early repayment pays off most in the early years of equal payment and the early-to-middle years of equal principal; late in an equal-principal schedule there is little principal left to attack. Check the penalty terms first.
Why is my total interest slightly off from the bank's figure?
Three usual causes: the bank accrues by actual days while this tool works in months, per-instalment rounding to the cent accumulates, and a disbursement date away from the start of the month makes the first period shorter. Small differences are expected; a difference in the hundreds usually means a wrong rate or term.
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