Two plans repay the same loan in the same number of months, yet they can differ in total interest by hundreds of dollars. The difference comes down to how fast the principal shrinks. This article puts both plans side by side on an identical loan so the gap is easy to see.
The two repayment plans
An amortizing (equal payment) loan keeps the monthly payment the same for the whole term. Each payment is split between interest and principal, and as the balance falls, more of each payment goes to principal. The payment never changes, which makes budgeting simple.
An equal-principal loan repays the same amount of principal every single month. Because the principal drops evenly, the interest charged each month keeps falling, and so does the total payment. You pay more at the start and less at the end.
The worked example
To compare them fairly, we use the same loan on both plans: $20,000 at 7.5% annual interest over 60 months. The monthly interest rate is the annual rate divided by 12, which is 7.5% ÷ 12 = 0.625%.
On the amortizing plan, the constant monthly payment is about $400.76. Multiply that by 60 payments and you pay about $24,046 in total, meaning roughly $4,046 of interest.
On the equal-principal plan, principal of $20,000 split across 60 months means $333.33 of principal each month. In month one you also pay 0.625% interest on the full $20,000, which is $125.00, so the first payment is about $458.33. Interest falls a little each month, and the total interest comes to about $3,813.
The interest gap
Subtract the two totals and the equal-principal plan saves roughly $233 in interest on the exact same loan. That saving is a direct result of paying the principal down faster, so less money sits in the balance accruing interest every month.
| Month | Amortizing payment | Equal-principal payment | Equal-principal balance |
|---|---|---|---|
| 1 | $400.76 | $458.33 | $19,666.67 |
| 30 | $400.76 | $363.39 | $10,000.00 |
| 60 | $400.76 | $335.42 | $0.00 |
Why equal-principal costs less
Interest is always calculated on the outstanding balance. The equal-principal plan brings that balance down evenly, so by the halfway point you owe half the original principal. The amortizing plan pays off principal more slowly, keeping the balance higher for longer and therefore charging more total interest.
The trade-off is cash flow. The equal-principal plan asks for about $458 in month one, which can strain a tighter budget. Early repayment demands more from you, and it only pays off if you can comfortably make the larger first payments.
Which one should you pick?
Choose equal-principal when you have room in your early budget, want to minimize total interest, and expect that you can sustain the larger upfront payments. Choose the amortizing plan when a flat, predictable payment matters more than shaving a few hundred dollars in interest, or when your lender only offers one of the two.
Your actual availability of each plan depends on the lender, because many loans come in only one flavour. Check your loan agreement, then compare the plans on identical terms before deciding.
Test your own numbers
Play with your own amount, rate and term, and see how the payment and interest change on either plan, with the LoanMetra loan calculator.