Equal Installments vs Equal Principal: Same Loan, Different Numbers

How the two methods differ

In Korea, as elsewhere, the two standard ways of repaying a loan in installments are equal installments of principal and interest, and equal principal. With equal installments, the combined payment of principal and interest is the same every month. Because interest is charged on the remaining principal, early payments are mostly interest and principal falls slowly; over time interest shrinks and the principal share grows. With equal principal, you repay the same slice of principal every month, the loan divided by the number of months, plus interest on that month's remaining principal. Since the most principal remains in the first month, the first payment is the largest, and payments fall a little each month as principal drops steadily. Separately, there is bullet repayment: interest only during the term and all principal at maturity. All three may carry the same rate, but they reduce principal at different speeds, so monthly burden and total interest differ. The repayment method is chosen independently of the rate type.

• Equal installments: same amount monthly; the interest share falls over time
• Equal principal: same principal plus interest on the balance; payments fall over time
• Bullet: interest only during the term, principal at maturity

How the calculation works

Equal principal is simple. The monthly principal is fixed at the loan divided by the total number of months, and each month's interest is the remaining principal times the monthly rate, which is the annual rate divided by 12. Equal installments use a formula to find the fixed payment that brings principal to exactly zero in the final month. The monthly payment is the principal times the monthly rate times one plus the monthly rate raised to the number of months, divided by that power minus one. Subtracting the month's interest from that payment gives the principal repaid that month. In real loans, daily interest calculation and rounding can cause differences of a few won to a few hundred won. A loan repayment calculator applies this formula directly, so once you understand the principle below you can check the numbers yourself.

• Monthly rate r = annual rate ÷ 12; number of months n
• Equal principal monthly principal = loan ÷ n
• Interest for the month = remaining principal × r
• Equal installment payment = principal × r × (1+r)ⁿ ÷ ((1+r)ⁿ − 1)

A worked example

To see the structure, take round numbers. These are illustrative figures for the calculation, not an actual product or current rate. Suppose you borrow 120 million won at a fixed 5 percent a year, repaid monthly over 30 years (360 months). The monthly rate is 5 percent divided by 12, about 0.4167 percent, and the first month's interest under both methods is 120 million won × 5% ÷ 12 = 500,000 won. With equal installments you pay about 644,000 won every month; in the first month 500,000 won of that is interest and only about 144,000 won is principal. With equal principal you pay 333,333 won of principal plus interest, about 833,000 won in the first month, falling to about 335,000 won in the last. Adding up 30 years of interest, equal installments total about 111.91 million won and equal principal 90.25 million won, a gap of about 21.66 million won. A bullet loan on the same terms means 500,000 won of interest for 360 months, 180 million won in total.

• Example terms: 120 million won, 5% fixed, 30 years (360 months)
• Equal installments: about 644,186 won a month, total interest about 111.91 million won
• Equal principal: about 833,333 won in month one → about 334,722 won in the last, total interest 90.25 million won
• Bullet: 500,000 won interest a month, total interest 180 million won

What changes over time

The difference is clearer along the time axis. In the same example, the equal principal payment starts at about 833,000 won and falls by about 1,389 won each month, because principal drops by 333,333 won monthly and the interest on that amount, about 1,389 won, disappears. Then in month 138, roughly eleven and a half years in, the equal principal payment drops below the equal installment of about 644,000 won, and from then on equal principal pays less. With equal installments the amount stays the same but its make-up shifts: in the first month about 78 percent of the 644,000 won is interest, but over time the interest share shrinks and the principal share grows, so the last few years are almost all principal. In short, equal principal pays more early and less later, while equal installments flatten the burden. Interest paid in the first ten years alone is about 54.91 million won with equal installments and about 50.08 million won with equal principal.

Remaining principal differs midway

The repayment method also affects how much principal remains if you sell the home or refinance partway through. In the same example, after ten years (120 months), equal principal has reduced the balance by exactly 333,333 won a month, leaving 80 million won. Equal installments repaid little principal early on, so about 97.61 million won remains. Because equal principal paid more each month early on, the remaining principal at the ten-year mark differs by more than 17 million won. So if there is a good chance you will settle or refinance within a few years, consider the principal remaining then and the early repayment fee on it. If you chose equal installments, knowing in advance that principal falls more slowly than you might expect prevents surprises when planning sale proceeds or a new loan amount. The repayment schedule in a loan repayment calculator shows the balance at any point.

Common misunderstandings

The most common misunderstanding is that equal installments are a losing method. Total interest is indeed higher, but not because the rate is higher; it is because you keep the principal borrowed for longer. At the same rate you pay the same price for the money and time borrowed, so it is a choice to lower the early burden in exchange for repaying principal later. Nor is equal principal always the answer: if the heavy early payments drain living costs or your emergency fund, trying to save interest can end in the far larger cost of arrears. Thinking an equal installment stays fixed even with a variable rate is also wrong; each time the rate changes, the payment is recalculated over the remaining term. And the idea that a longer term simply makes things easier is only half true: the monthly burden falls, but, as the example shows, total interest rises sharply with the term.

• Thinking equal installments carry a more expensive rate
• Thinking equal principal is right for everyone
• Thinking equal installments stay fixed even at a variable rate
• Thinking a longer term lowers the burden at no extra cost

Regulatory limits and repayment method

The repayment method can affect not just the monthly burden but also how the loan limit is calculated. DSR, which compares annual repayments on all loans to income, adds a year's principal and interest, so equal principal, with its larger first-year payments, can show a larger first-year figure than equal installments on the same terms. In the example, first-year repayments are about 7.73 million won with equal installments and about 9.9 million won with equal principal, summing its declining payments. How the rules reflect each repayment method can vary by regulation and product, however, so confirm the actual limit in the lender's review. In principle, if you need to secure the maximum limit on a given income, equal installments may help, and if you have room under the limit and reducing total interest comes first, equal principal is worth considering. Either way, the yardstick should be a payment you can live with, not the limit.

Checks when choosing

When choosing a repayment method, ask which one your cash flow can sustain before asking which one pays. First calculate the first equal principal payment and check whether its share of income is manageable after living costs and emergency savings. If it is not, equal installments are the realistic choice. Next consider your future income: if it is likely to rise, the flat early burden of equal installments fits; if retirement or a fall in income is coming, paying down more early with equal principal may be better. If you plan to repay early or refinance, compare the remaining principal at that point. Finally, check the total interest difference and judge whether it justifies the heavier early burden. Even with equal installments, repaying some principal early when you have spare funds can achieve an effect close to equal principal.

• 1. Check whether the first equal principal payment is manageable
• 2. Consider your future income (expected rise or fall)
• 3. If you plan to repay early or refinance, compare balances at that point
• 4. Weigh the total interest difference against the heavier early burden
• 5. Check early repayment fee conditions

Situations people ask about most

Many ask whether the repayment method can be changed after borrowing. Depending on the lender and product it may be possible, with conditions, or not at all, so check the agreement and the lender's notice. If it cannot be changed, keeping equal installments and repaying part of the principal early with spare funds is a realistic alternative. After a partial prepayment you may be able to choose between lowering the monthly payment and shortening the term; shortening the term usually cuts total interest more. If a dual-income couple is expecting a child or parental leave, check that the heavy early payments of equal principal do not coincide with the period of reduced income. If the loan has a grace period, you pay only interest during it and the payment jumps when it ends, so calculate the payment after the grace period in advance.

• Changing the method: check the agreement and the lender's notice
• Partial prepayment: choose between a lower payment and a shorter term
• Grace period: calculate the payment after it ends in advance

Limits and disclaimer

The worked example uses illustrative figures assuming 120 million won at a fixed 5 percent repaid monthly over 30 years; it does not represent any actual product's rate or terms. Real loans differ with the day-count for interest, rounding, variable rates, grace periods and prepayments. How each method is treated in regulatory calculations, and whether it can be changed, also depend on the product and rules. This guide is a general explanation of loan repayment structure in Korea; it does not recommend any product and is not financial advice. Products, terms and regulations differ by company and over time, so before signing, check the product description and terms and confirm the latest criteria with the Financial Services Commission, the Financial Supervisory Service and your bank. For exact figures for your own terms, enter the actual amount, rate and term into a loan repayment calculator and compare the result with the repayment schedule the lender provides.