How the two repayment methods are calculated
Equal installment pays the same total amount every month, using the standard loan annuity formula. Equal principal repays a fixed slice of principal every month, so the payment is largest in month 1 and shrinks as the balance — and the interest charged on it — declines.
- P — loan principal
- r — monthly rate = annual rate / 12
- n — number of months
- M — equal-installment monthly payment
More detail
Why equal principal costs less total interest at any rate above 0%, over two or more months
In equal principal, the same fixed slice of principal is repaid every month, so the outstanding balance — and the interest charged on it — falls faster than under equal installment, where early payments are mostly interest and principal barely moves. Charging interest on a smaller average balance means less interest paid overall, for the exact same rate and term.
The tradeoff is cash flow, not cost
At any rate above 0%, on a term of two months or more, equal principal's first payment is higher than equal installment's flat payment on the same loan, because the full first-month interest lands on top of a larger fixed principal slice. Equal installment trades that extra interest for a payment that never changes — easier to budget against, especially early in the loan when cash flow is tightest.
Money tip. If your income can absorb a higher payment in the first year or two, equal principal is cheaper over the full term at any rate above 0%. If you need a predictable, flat payment from day one — or your income is expected to rise — equal installment's stability is worth its extra interest.
Frequently asked questions
Why is equal-principal total interest lower than equal-installment, for the same rate (above 0%) and a term of two months or more?
Because equal principal repays a fixed principal slice (P/n) every month, so the remaining balance — and the interest charged on it (balance × r) — declines faster than under equal installment, where the early payments are mostly interest and the balance barely drops. Interest on a smaller average balance adds up to less total interest, which is exactly what the interest-savings figure above shows.
Why does the equal-principal first payment start higher than the equal-installment payment?
At any rate above 0% and over two or more months, the equal-principal first payment is P/n (fixed monthly principal) plus the full first-month interest on the entire loan balance, since none of it has been repaid yet — that's larger than equal installment's flat payment, which spreads the same total more evenly. The gap narrows every month as equal principal's balance, and therefore its interest, keeps shrinking. At exactly 0% there is no interest to add, so both methods pay a flat P/n and the two are identical; on a one-month term they are identical too, since each simply repays the principal plus one month of interest.
Does a longer term widen the interest-saving from equal principal?
Yes — both in amount and as a share of total interest. On 30,000,000 won at 6% over 36 months the saving is roughly 80,000 won (about 2.8% of equal-installment's total interest); stretch the same loan to 360 months and the saving grows to over 22% of total interest, because equal installment's slower balance paydown compounds over far more months.
How is the interest-saving figure above calculated?
It's equal-installment total interest minus equal-principal total interest, both computed from the same principal, rate, and term you entered above — so it isolates exactly what the repayment method itself costs or saves, with the loan terms held constant.