Loan Repayment Methods Compared: Equal Payment vs Equal Principal vs Bullet Repayment

Whether you're buying a home, a car, or funding a business, loans are an unavoidable reality. But the way you choose to repay a loan can make a difference of tens of thousands of dollars in total interest. Today, we compare the three most common loan repayment methods in detail.

Three Types of Loan Repayment

1. Equal Payment (Equal Installment)

"Pay the exact same amount every month"

With equal payment, you pay the same fixed amount throughout the loan term. In the early months, a larger portion of your payment goes toward interest, and over time, more goes toward the principal.

Formula:

$PMT = P \times \frac{r(1+r)^n}{(1+r)^n - 1}$

• $P$: Loan principal
• $r$: Monthly interest rate (annual rate ÷ 12)
• $n$: Total number of payments (years × 12)

Pros:

• Fixed monthly payment makes budgeting easy
• Lower initial payment compared to equal principal

Cons:

• More total interest paid compared to equal principal (interest-heavy in early months)
• Principal reduces slowly at first

2. Equal Principal Repayment

"Repay the same principal amount each month, with decreasing interest"

With equal principal repayment, you repay the same amount of principal each month, while the interest portion decreases as the balance drops. Monthly payments start high and gradually decrease.

Calculation:

• Monthly principal = Total principal ÷ Number of payments
• Monthly interest = Remaining balance × Monthly rate
• Monthly payment = Monthly principal + Monthly interest

Pros:

• Lowest total interest of the three methods (principal shrinks faster)
• Monthly burden decreases over time

Cons:

• Highest initial monthly payment, which may strain your budget early on
• Variable monthly payments make budgeting more complex

3. Bullet Repayment (Interest-Only)

"Pay only interest each month; repay the full principal at maturity"

With bullet repayment, you pay only the interest each month for the loan term, then repay the entire principal in one lump sum at maturity.

Calculation:

• Monthly payment = Principal × Monthly interest rate (same every month)
• Maturity payment = Full principal + final month's interest

Pros:

• Lowest monthly payment of the three methods
• Frees up monthly cash flow for investment or other uses

Cons:

• Highest total interest paid (the principal never decreases during the term)
• Requires a large lump sum at maturity

Side-by-Side Comparison with Real Numbers

Example: 300,000,000 KRW loan, 4.5% annual rate, 30-year term

Equal principal repayment saves approximately 20 million KRW vs. equal payment, and roughly 80 million KRW vs. bullet repayment.

Which Method Is Right for You?

Choose Equal Payment if:

• You have a stable salary and need predictable monthly budgeting
• Your initial cash flow is limited
• You're taking out a long-term mortgage (this is the most commonly offered option by banks)

Choose Equal Principal if:

• You have sufficient early income and want to minimize total interest
• You want to reduce your principal balance quickly for peace of mind
• You're taking a medium-term loan (5–10 years)

Choose Bullet Repayment if:

• You need to maximize monthly cash flow (e.g., early-stage business)
• You expect your investment returns to exceed the loan interest rate
• You need short-term financing or a bridging loan

Tip: Use Prepayment to Reduce Your Total Interest

Regardless of which method you choose, making extra payments when you have spare cash can significantly reduce your total interest burden.

• Equal payment: Prepaying early is most effective (when interest proportion is highest)
• Equal principal: Also benefits significantly from early extra payments
• Always check if a prepayment penalty applies (commonly within the first 3 years)

Conclusion

Choosing a repayment method goes beyond just "how much do I pay per month." It requires a holistic view of your financial situation, investment plans, and personal risk tolerance.

In summary:

• Minimize total interest → Equal Principal Repayment
• Stable monthly payments → Equal Payment
• Maximize monthly cash flow → Bullet Repayment

Use the Loan Calculator below to instantly compare all three methods with your own numbers — monthly payments and total interest included!