The number that surprises everyone

Borrow 1,000,000 at 4.5% over 30 years. The monthly payment is 5,066.85. Multiply it out and you pay back 1,824,067 — of which 824,067 is interest, about 82% of the amount you borrowed.

Now the part that really catches people: in the first five years you hand over 304,011, but only 88,421 of it reduces the loan. The other 215,590 is interest. Five years of payments, and the balance has barely moved.

That is not a trick or a trap — it is what declining-balance interest looks like when the term is long. Understanding the shape of it is the difference between choosing a loan deliberately and choosing one by monthly payment alone.

You can run your own numbers in the loan calculator while reading this.

Two repayment structures

Annuity (equal instalment, 等额本息). The monthly payment never changes. Early payments are mostly interest; later payments are mostly principal. Easy to budget, more total interest.

Equal principal (等额本金). The principal repaid each month is constant, so interest falls every month and so does the payment. The first payment is the highest, the last is the lowest, and total interest is lower.

The formula

Annuity:          M = P × r × (1+r)^n / ((1+r)^n − 1)
Equal principal:  principal = P / n,  interest = balance × r

Where P is the principal, r the monthly rate (annual ÷ 12) and n the number of months. M is the fixed monthly payment for an annuity loan.

Term matters more than the rate

Same 1,000,000 at 4.5%, only the term changes:

Term Monthly payment Total interest Total repaid
10 years 10,363.84 243,660.91 1,243,660.91
20 years 6,326.49 518,358.50 1,518,358.50
30 years 5,066.85 824,067.12 1,824,067.12

Stretching from 20 to 30 years cuts the monthly payment by 20% but adds 305,709 in interest. That is the real price of the extra ten years.

The rate: small changes, large money

Rate Monthly payment Total interest
3.5% 4,490.45 616,560.88
4.5% 5,066.85 824,067.12
5.5% 5,677.89 1,044,040.40

One percentage point changes the monthly payment by about 576 — and the total interest by more than 219,000 over 30 years. When comparing offers, negotiate the rate before you negotiate anything else.

Annuity vs equal principal, on the same loan

Annuity Equal principal
First payment 5,066.85 6,527.78
Last payment 5,066.85 2,788.19
Total interest 824,067.12 676,875.00

Equal principal saves 147,192 in interest — but asks for 1,461 more in the first month. Whether that trade is worth it depends on your cash flow, not on the maths: if the higher payment is uncomfortable, the “cheaper” option is the wrong one.

What an extra payment actually does

Add 2,000 a month to the same 30-year annuity loan:

Without extra With 2,000/month
Term 30 years 16 years 11 months
Total interest 824,067.12 428,101.16

You finish 157 months early and save roughly 396,000 in interest. Two reasons it works so well:

  1. Every extra goes entirely to principal, so it also cancels all future interest on that amount.
  2. It compounds in reverse: the earlier the extra, the more future interest it removes.

This is why “pay a little extra from year one” beats “pay a lot extra in year twenty”.

Five mistakes worth avoiding

  1. Choosing by monthly payment only. The cheapest month is often the most expensive loan.
  2. Ignoring the total. Always look at total interest, not just the instalment.
  3. Forgetting escrow. Property tax and insurance are usually collected on top; they can add 20–30% to the real monthly outflow.
  4. Assuming the rate is fixed. For adjustable-rate products, model the worst realistic rate.
  5. Overlooking early-repayment terms. Some loans charge a fee, which can wipe out the benefit.

FAQ

Which is better, annuity or equal principal? Equal principal costs less in total interest; annuity is easier on early cash flow. If you can afford the higher first payment and plan to keep the loan, equal principal wins on cost.

Is a shorter term always better? On cost, yes. On flexibility, no — a shorter term means a higher mandatory payment. Many people take the longer term and pay it down faster voluntarily, which keeps the option to slow down if life changes.

How much does one extra payment a year help? Meaningfully, and it costs almost nothing to arrange. Model it in the calculator with the annual amount divided by twelve.

Does this include taxes and insurance? No. The calculator models principal and interest only.

This article is educational and is not financial advice. Rates and terms vary by lender and country — always read the actual contract.