Three ways to repay the same loan
The amount, the rate and the term are only half the picture. How the principal is scheduled decides both what you pay each month and what the loan costs in total.
| Method | What you pay monthly | Total interest |
|---|---|---|
| Amortizing (equal total payment) | The same every month. Early payments are mostly interest, later ones mostly principal. | Middle |
| Equal principal | Highest at the start, falling every month as the balance shrinks. | Lowest |
| Interest-only | Only the interest. The balance never moves. | Highest |
Interest is charged on what you still owe. Anything that keeps the balance high for longer costs more, which is the whole of the difference below.
300,000 at 5.0% over 30 years
Amortizing → about 1,610 a month, roughly 280,000 in interest
Equal principal → starts near 2,083 and falls, about 226,000 in interest
Interest-only → 1,250 a month, 450,000 in interest, and the 300,000 still due at the end
Interest-only costs roughly twice what equal principal costs on identical terms. Neither the rate nor the term changed — only the schedule.
What a grace period really costs
A grace period lets you pay interest only for an opening stretch. It lowers the early payments, and it is charged for twice over.
First, the balance does not fall during it, so you pay interest on the full amount for the whole period. Second, the principal now has to be cleared over a shorter remaining term, which lifts every payment that comes after. Set the grace field above to see both effects at once.
Why a lender quote differs from this
This computes principal and interest, nothing else. A real quote usually adds arrangement or origination fees, mortgage or lenders’ insurance, property insurance, and any early repayment charge. Several markets also assess you at a rate above the one you sign — a stress test — so the affordability figure a lender uses is deliberately harsher than the contract rate.
Any currency
No currency is attached to these figures. Interest scales with the amount, so the arithmetic is identical whether the numbers are dollars, pounds, euros or yen. Keep every input in one currency and the result holds.
Common questions
- Which repayment method costs the least interest?
- Equal principal. You pay down the balance fastest, so less interest accrues. It also has the highest payments at the start, which is why amortizing is more common.
- Why is my bank quoting a higher payment than this?
- This calculates principal and interest only. Lender quotes often fold in arrangement fees, mortgage insurance, property insurance or an assessment rate that is higher than the contract rate.
- What does a grace period actually cost?
- Two things. The balance does not fall while it lasts, so you pay interest on the full amount throughout, and the principal then has to be repaid over a shorter remaining term, which raises every later payment.
- What currency does this use?
- None in particular. Interest is proportional to the amount, so the result is correct for any currency as long as you enter every figure in the same one.