Loans and debt
Annuity or equal principal payments: which loan schedule is cheaper
We calculate a UAH 100,000 loan both ways: where the payment is lower, where the total interest is lower and what early repayment changes.
Annuity payment: what it means
An annuity payment is a loan repayment scheme in which you pay the same amount every month for the whole term.
An annuity means equal monthly loan payments. Early in the term most of each payment goes on interest; towards the end, most of it repays the loan itself.
The alternative is the classic, or declining, scheme: the principal is repaid in equal parts and interest is charged on the remaining balance, so the first payments are the largest and the last ones the smallest. Total interest is slightly lower under the classic scheme, but the early payments are harder.
Example: a UAH 100,000 loan at 24% a year for 12 months costs UAH 9,456 a month and UAH 13,472 in interest as an annuity; under the classic scheme, interest comes to UAH 13,000.
In detail, with examples: Annuity or equal principal payments: which loan schedule is cheaper
Related terms
Real annual interest rate Credit history
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