Equal Payment vs Equal Principal Repayment: Comparing the Total and the Monthly Burden

Is it the payment or the principal that's equal?

The similar names cause confusion, but the only difference is what's held constant. Both calculate interest the same way (balance × annual rate ÷ 12); they differ in how principal is paid down.

• Equal-payment repayment: each payment (principal + interest) is constant. At first the interest share is large, and the principal share grows gradually. This is the mainstream for mortgages in Japan.
• Equal-principal repayment: the principal repaid each time is constant, with interest on the balance added on top. The first payment is the highest, and the amount falls with each payment.

With equal principal, principal falls at a steady rate from the start, so the balance drops sooner. A smaller balance means less interest, which gives it the advantage in total cost. On the other hand, a payment that changes every month is harder to manage in a budget, and some lenders don't offer it as a product.

Comparing amounts under the same terms

For ¥30 million over 35 years at an annual 1.0% with no bonus payments, the result is as follows.

The gap in total repayment is ¥305,472, less than 1% of ¥35.56 million. In exchange, the first payment with equal principal is ¥11,743 heavier. The payment doesn't fall below the equal-payment amount until the 199th payment, about 16 and a half years in, and until then you keep paying more.

Differences beyond the total

If you choose equal principal based only on the gap in amounts, it can affect you in other ways.

• Lower borrowing capacity: screening is based on the first payment, so with the same income you can borrow less with equal principal.
• The start of repayment is the hardest: furniture, appliances and moving costs tend to pile up when you've just moved in, and that's when you'd pay the highest amount.
• Some lenders don't offer it: many products, mainly from online banks, offer equal-payment repayment only.
• Harder to plan a budget: because the monthly payment changes, it's harder to treat it as a fixed cost.

Equal principal suits you if you have plenty of room in the initial payment and want to reliably keep total interest down. For someone expecting lower income in the future, a falling burden is itself an advantage.

With a short term, there's almost no difference

The difference between methods shows up in money on loans with long terms and large balances. Compared on a car loan (¥3 million, 5 years, annual 3.5%), the gap stays about this small.

The interest gap is ¥7,632. On a loan of about 5 years, the result is nearly the same whichever you choose. The method is worth agonizing over only for loans of more than 20 years, such as mortgages. Lowering the rate itself has a bigger effect, as you can see in interest rates and total repayment.

Switch and check with the tool

In the Loan Repayment Simulator, you just press the repayment method buttons to compare both sets of numbers. It switches without changing the terms, so you can see how much difference there is under your own loan terms.

1. 1

   Enter the loan amount, rate and term

   Enter the terms you're actually considering. If you plan to use bonus payments, set that amount too.

2. 2

   Switch between "Equal payment" and "Equal principal"

   The monthly payment, total repayment, interest and payoff date switch on the spot. Equal principal shows both the first and final payment amounts.

3. 3

   See the payment trend in the schedule

   The monthly view shows how much the equal-principal payment falls each month. The yearly view lets you follow how the burden changes each year.

4. 4

   Check your budget against the first payment

   If you choose equal principal, the deciding figure isn't the total but the first payment. Decide based on whether you can keep paying that amount for years.

How the payment itself is calculated is covered in how to calculate loan payments, and how to think about what you can borrow in calculating your borrowing capacity.

FAQ

Which saves more, equal payment or equal principal?

On total repayment alone, equal principal. For ¥30 million over 35 years at 1.0%, interest is ¥305,472 lower. But the first payment is ¥96,428, which is ¥11,743 more than the ¥84,685 for equal payment. The gap in the total is under 1%, so a practical choice is equal payment if you want a stable monthly burden, and equal principal if you have room in the early payments.

When does the equal-principal payment fall below equal payment?

For ¥30 million over 35 years at 1.0%, at the 199th payment (16 years 7 months in). Until then you pay more than with equal payment, and after that it keeps falling to a final payment of ¥71,727. Think of nearly half the term as the heavy period, and judge whether your budget can bear it.

Does equal principal reduce how much I can borrow?

Generally, yes. Screening looks at the debt-to-income ratio using the first payment, so with the same income you can borrow less. For ¥30 million over 35 years at 1.0%, the first payment is more than 10% higher, so expect your borrowing capacity to shrink by about that much.

Can I change the repayment method partway through?

As a rule, no. The method set at signing continues until payoff. To change it you need to refinance, which involves separate costs such as a processing fee and registration. It's important to compare the numbers for both before signing.

Do bonus payments reduce the total repayment?

No. Bonus payments lower the monthly payment in exchange for paying that portion in bonus months. Allocating ¥6 million of ¥30 million to bonus repayment lowers the monthly payment to ¥67,748, but adds ¥101,799 in bonus months, and the total repayment actually rises by about ¥12,000. Decide carefully, taking into account the risk of your bonus falling.