Which part of this month’s bill reduces the debt?
Suppose you still owe ₩30 million and pay ₩120,000 only for the cost of borrowing. You still owe the ₩30 million afterwards. The money owed is the principal; the borrowing charge is interest. A monthly payment can contain both, but only its principal part reduces the amount you must return. The ₩ sign means South Korean won.
One way is to divide the borrowed money into equal pieces and pay one piece back each month. Add that month’s interest on top. This is equal principal repayment. As the amount owed falls, the interest falls too if the rate stays unchanged.
Another way is to keep the total principal-and-interest bill the same. Use part of it for that month’s interest and the rest to reduce the debt. This is equal principal-and-interest payments, shortened below to “equal payments”. The split changes as the debt gets smaller. The fixed schedule here depends on the rate remaining unchanged.
Both methods gradually pay back the borrowed money. That process is called amortization. It is separate from whether the rate itself stays fixed or can change. A fixed rate keeps the agreed percentage for its fixed period; a variable rate can be recalculated under the contract’s rules. We calculate the schedules below from the stated conditions and check the monthly balances against the payment formula.
Keep the amount, rate and term the same
Take a hypothetical ₩30,000,000 loan over 36 months at a fixed annual rate of 4.8%. Both schedules below repay it in full. Payments arrive at the end of each month, and interest uses the balance before that month's payment.
For this example, divide 4.8% a year by 12 to get 0.4% per month. For multiplication, divide 0.4 by 100 and use 0.004. There is no initial period delaying repayment of the borrowed amount, no early repayment and no fee. We also exclude tax and insurance. This is an educational calculation, not a current loan offer. A lender may count days or round payments differently, producing different amounts.
The first month's interest is ₩30,000,000 × 0.004 = ₩120,000 under either method. The schedules begin to separate when the first principal payment reduces the balance by different amounts.
Equal principal starts higher, then falls
Divide the borrowed amount into 36 pieces: ₩30,000,000 ÷ 36 = ₩833,333.333… to repay each month. Add the month’s interest for the total payment. In the table, “balance after payment” is the debt left after that month’s principal is returned; the following month’s interest uses that smaller amount.
Scroll wide tables sideways. Keyboard: focus the table, then use the arrow keys.
| Month | Principal repaid | Interest | Payment | Balance after payment |
|---|---|---|---|---|
| 1 | 833,333 | 120,000 | 953,333 | 29,166,667 |
| 18 | 833,333 | 63,333 | 896,667 | 15,000,000 |
| 36 | 833,333 | 3,333 | 836,667 | 0 |
The payment falls because less money remains borrowed. Even with the rate fixed at 4.8%, the interest charge gets smaller. By the eighteenth payment, exactly half of the original principal has been repaid.
The early payments are the part to test against your budget. Being able to afford the smaller bill near the end does not solve a shortfall in the first few months.
Equal payments: the same bill, a changing split
The fixed monthly principal-and-interest payment for this loan is about ₩896,436. The first payment covers ₩120,000 of interest and pays off about ₩776,436 of principal. As the balance falls, interest takes a smaller share of the same payment.
| Month | Principal repaid | Interest | Payment | Balance after payment |
|---|---|---|---|---|
| 1 | 776,436 | 120,000 | 896,436 | 29,223,564 |
| 18 | 830,957 | 65,479 | 896,436 | 15,538,691 |
| 36 | 892,864 | 3,571 | 896,436 | 0 |
After 18 payments, about ₩15.54 million is still owed, compared with ₩15 million under equal principal. Equal payments have returned less principal during the first half of this term, then catch up before the final payment.
You can budget for the same bill each month, but the balance will not fall by that full amount. Some of it is interest.
Every table cell is rounded independently to the nearest won. Principal plus interest can therefore differ from the displayed payment by ₩1. Calculations retain full precision until display; a real lender may round each payment and adjust the last one.
The interest saving comes from paying principal sooner
| Method | Monthly payment | Total interest | Total repaid |
|---|---|---|---|
| Equal principal | Declines from ₩953,333 to ₩836,667 | ₩2,220,000 | ₩32,220,000 |
| Equal payments | ₩896,436 | ₩2,271,679 | ₩32,271,679 |
Equal principal costs about ₩51,679 less in interest in this example. It pays back more of the borrowed money sooner, leaving a smaller balance on which to charge interest. The lender has not given it a lower rate.
Its first payment is about ₩56,898 higher, calculated from the unrounded amounts. That extra cash is due in the first month; the ₩51,679 saving is interest over all 36 months. Keep those different time periods in mind when checking what your monthly budget can cover.
Totals use the unrounded monthly payment. Multiplying the displayed ₩896,436 by 36 therefore gives a slightly different result from the total shown here.
This gap is specific to the amount, rate and term used here. A longer term or a different rate changes it. Compare schedules for the same loan conditions before attributing a difference to the repayment method.
Check the monthly-payment formula
You can reproduce the calculation with P as the loan amount, r as the monthly rate and n as the payment count. Equal principal repays P ÷ n each month. For a positive interest rate, the equal-payment formula is A = P × r ÷ [1 − (1 + r)−n]. At a zero interest rate, the payment is simply P ÷ n.
Here, P = 30,000,000, r = 0.004 and n = 36; the unrounded payment is ₩896,435.5243….
An interest-only bill leaves the principal waiting
Keep the same invented loan, but this time pay only the borrowing charge each month and return all the money on the agreed last date, called maturity. Since none of the ₩30 million has been paid back, monthly interest remains ₩120,000. A small regular bill therefore does not mean a small remaining debt.
The first 35 payments are ₩120,000 each. The last payment is ₩30,120,000: the full principal plus the final month's interest. Total interest is ₩120,000 × 36 = ₩4,320,000, and total repayment is ₩34,320,000.
The small regular bill can hide the size of that final obligation. Refinancing means taking a new loan to repay the old one. Planning to do that depends on another loan being available on acceptable terms at the time. The plan itself does not repay the balance.
An interest-only period can also be followed by instalments rather than one final lump sum. In that case, the later schedule must repay the principal over the remaining term. Read what happens when that period ends; the three-year example above, with all principal due at the end, is one arrangement rather than a description of every interest-only loan.
A rate reset or an extra payment changes the comparison
The equal-payment figure above depends on the rate staying fixed. With a variable-rate loan, the applied rate can change at scheduled reset dates. That can change the interest charge and the required payment. “Equal payments” names the repayment method; it does not promise the same bill after every rate change. The contract determines how the schedule is revised.
Even a fixed principal-and-interest amount is not necessarily the total debit from your account. Insurance, taxes or other charges may be collected alongside it. An additional charge can therefore change the total debit without changing the loan rate.
Paying extra principal early reduces the balance used for later interest calculations in this model. For a real loan, check any early repayment charge and ask how the payment will be applied. Will the remaining term shorten, will future payments be recalculated, or does the lender require a separate request? Do not assume one procedure applies to every product.
Early repayment charges depend on the country and contract. If you expect to repay early, compare interest paid up to that date, the principal still owed and the applicable charge, rather than relying on our full-term interest totals.
Ask the lender for a schedule using your actual amount and term. Find the first payment and the month with the largest bill. If you expect to repay early, look at the balance on that date too. These are the amounts your income and savings will have to cover, including any final lump sum.
About the examples
The fictional loan starts at ₩30,000,000 with a fixed annual rate of 4.8%, a monthly rate of 0.004 and 36 end-of-month payments. Monthly balances and the payment formula were checked separately. Calculations retain full precision and round to won only for display. Fees, insurance, taxes, grace periods and rate resets are excluded; real lenders’ day-count and final-payment rules can differ. Editorial policy.