Loan details
Fees, insurance and rate changes are not included.
Two ways to pay the same loan back
With level payments (an annuity), every instalment is the same size; early on most of it is interest and only later does the principal start falling quickly. With straight-line repayment you pay a fixed slice of principal each month plus interest on what is left, so the first payment is the largest and each one after it is smaller.
Level payments cost more in total
Because the balance falls more slowly, more interest accrues. Straight-line is cheaper overall but demands more in the early months, which is exactly when most people can least afford it. The right answer depends on your cash flow, not on which number is smaller.
What this does not know
Arrangement fees, insurance, early-repayment charges and any rate that changes partway through are not modelled. On a long mortgage those can move the real cost by more than a rate difference of half a point.
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Frequently asked questions
Q. Which method is cheaper?
Straight-line, in total interest. The difference grows with the term — on a 30-year loan it can be substantial, on a 3-year car loan it is small.
Q. Why is my first payment mostly interest?
Interest is charged on the outstanding balance, which is at its highest at the start. With level payments the split shifts towards principal gradually as the balance falls.
Q. Is the rate annual?
Yes. It is divided by twelve to get the monthly rate, which is how most consumer loans are quoted and calculated.