Equal payments, equal principal or interest only?

Three ways to repay one loan

Lenders around the world offer the same loan with different repayment schedules. With equal payments (an amortizing loan, the usual mortgage in the US and the "원리금균등" method in Korea) every monthly payment is the same; early payments are mostly interest and later ones mostly principal. With equal principal ("원금균등", common in Korea and parts of Europe) you repay the same slice of the loan every month plus that month's interest, so the payment starts high and falls. With interest only (a balloon or bullet loan, "만기일시") you pay just the interest each month and the whole loan at the end.

Take $200,000 borrowed at 6% a year for 20 years, 240 monthly payments.

The same loan, three results

Equal payments: $1,432.86 every month, $143,887.30 of interest in total.

Equal principal: $833.33 of principal plus interest each month, so the first payment is $1,833.33 and the last $838.30. Total interest is $120,500.47, about $23,000 less, because the balance falls faster.

Interest only: $1,000 a month for 239 months and $201,000 in the last month. Total interest is $240,000, the most of the three, because the full $200,000 is owed for the whole term.

The rule behind it is simple: interest is charged on the balance still owed, so any method that pays the balance down sooner pays less interest. You can switch between the three in the loan calculator and see the schedule for each.

Who each method suits

Equal payments suit most household budgets: the payment never changes, which makes planning easy, and in the first years it is lower than the equal-principal payment.

Equal principal suits borrowers who can afford a higher payment now and expect money to get tighter later, for example before retirement. It costs the least interest, and the payment drops a little every month.

Interest only keeps payments lowest until the end, which can make sense for a short bridge loan or an investment property you plan to sell, but the final payment must be covered by a sale, savings or a new loan. If that plan fails, the borrower faces the whole balance at once.

What the first year looks like

In year one the interest paid is close for all three: $11,854.75 with equal payments, $11,725.00 with equal principal and $12,000.00 interest only. The difference builds over the term as the balances drift apart. That is why comparing only the first payment, or only the first year, gives a misleading picture: look at the total interest and at the balance after a few years as well.

Checking an offer

Ask the lender which method the quote uses, whether early repayment carries a fee, and whether the rate is fixed. A variable rate changes all three schedules. If the quote is in another country's terms, the method names above map onto it: amortizing or annuity loans are equal payments, linear repayment is equal principal, and balloon or bullet loans are interest only.

Paying extra changes the picture

An extra payment toward principal works with any of the three methods and cuts interest because the balance falls sooner. On an equal-payment loan it shortens the term; some lenders can instead lower the monthly payment. Before paying extra, ask whether the loan has an early repayment fee, which is common on fixed-rate loans in some countries, and compare the saving with what the money could earn elsewhere.

In short

Equal payments give a steady budget, equal principal costs the least interest, and interest only keeps payments lowest until a large final bill. Compare the total interest and the balance after a few years, not just the first payment, and ask the lender which method a quote uses.