Step 1: Understanding the Two Loan Repayment Methods
When taking out a mortgage or personal loan, borrowers often face two repayment structure options: Equal Total Payment (Annuity) and Equal Principal Repayment. Each has its own financial implications, especially when viewed over the full loan term.
Equal Total Payment (원리금균등상환 / Annuity Repayment)
- Definition: Monthly payments (principal + interest) remain constant throughout the loan period.
- Interest dynamics: Early payments are mostly interest, with the principal portion increasing over time.
Equal Principal Repayment (원금균등상환 / Straight-Line Repayment)
- Definition: The same amount of principal is paid each month, but interest decreases as the outstanding balance shrinks.
- Interest dynamics: Higher initial payments, but payments decrease steadily over time.
Step 2: Numerical Comparison – Real-World Example
Let’s compare the two methods using a 20-year loan (240 months), 2.5% fixed annual interest, with a loan amount of ₩100 million.
| Metric | Equal Total Payment | Equal Principal Repayment |
|---|---|---|
| First Monthly Payment | ₩1,010,000 approx. | ₩1,160,000 approx. |
| Final Monthly Payment | ₩1,010,000 (fixed) | ₩730,000 approx. |
| Total Interest Paid | ₩13,692,000 | ₩12,371,000 |
| Total Repayment | ₩113,692,000 | ₩112,371,000 |
✅ Key Takeaway: Equal principal repayment results in ~₩1.32 million less in total interest over 20 years, but monthly payments are initially much higher.
Step 3: Pros and Cons of Each Method
✅ Equal Total Payment: Pros & Cons
Pros:
- Predictable monthly payment helps with budgeting.
- Lower initial financial burden.
- Easier to qualify for loans (lower DTI ratio early on).
Cons:
- Higher total interest cost over the full term.
- Principal reduction is slower in the early years.
✅ Equal Principal Repayment: Pros & Cons
Pros:
- Lower overall interest payments.
- Faster principal reduction.
- More beneficial for long-term or early payoff borrowers.
Cons:
- Heavier financial burden in the early years.
- Harder to manage cash flow without stable income.
Step 4: Regional Usage and Preferences
- In South Korea, annuity-style (Equal Total Payment) is widely offered and preferred, especially for housing loans, due to its simplicity and cash flow stability.
- In countries like the U.S. and Australia, both methods are used. Borrowers often choose based on life stage, income predictability, and long-term planning.
Step 5: Personal Strategy & Practical Cases
📌 Case 1: First-time Homebuyer with Limited Income
- Recommended: Equal Total Payment.
- Rationale: Stable monthly payments make budgeting easier and reduce initial stress.
📌 Case 2: Long-Term Investor or High-Income Earner
- Recommended: Equal Principal Repayment.
- Rationale: Can absorb the higher initial payments and reduce interest burden, especially useful for rental property loans.
📌 Case 3: Planning Early Repayment (e.g., in 10 years)
- Recommended: Equal Principal Repayment.
- Rationale: Since more principal is paid early, prepayment leads to bigger interest savings.
Bonus: Interest Cost Difference – 2.5% Over 20 Years
| Loan Amount | Equal Total Interest | Equal Principal Interest | Interest Saved |
|---|---|---|---|
| ₩100 million | ₩13.69 million | ₩12.37 million | ₩1.32 million |
| ₩200 million | ₩27.38 million | ₩24.74 million | ₩2.64 million |
| ₩300 million | ₩41.08 million | ₩37.11 million | ₩3.97 million |
Conclusion
Choosing between Equal Total Payment and Equal Principal Repayment depends on your financial goals and monthly cash flow capacity.
| Goal | Recommended Repayment Type |
|---|---|
| Lower monthly payments | Equal Total Payment |
| Minimize total interest | Equal Principal Repayment |
| Stable budgeting | Equal Total Payment |
| Early payoff / Long-term saving | Equal Principal Repayment |
Ultimately, while Equal Principal Repayment saves more in interest, Equal Total Payment offers simplicity and lower upfront pressure. Evaluate your income stability, future plans, and risk tolerance to decide the optimal path.
📊 Tip: Use online mortgage calculators with both methods to visualize your amortization schedule and find the best fit for your loan.
What Is Equal Principal and Interest Repayment? Easy Loan Guide for Beginners
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