The 4 Main Repayment Methods
Not all loans are repaid the same way. The method you choose can save — or cost — you thousands in interest. Here's how the four most common methods compare. (For high-APR card balances specifically, see how to pay off credit card debt — the math is different from amortizing loans.)
Calculate Your Loan
Try different repayment methods with our loan calculator:
Method 1: Equal Payment (Amortization)
How it works: You pay the same fixed amount every month. Early payments are mostly interest; later payments are mostly principal.
Example: $200,000 loan at 7% for 30 years
| Year (first payment) | Monthly Payment | Interest Portion | Principal Portion |
|---|---|---|---|
| 1 | $1,331 | $1,167 (88%) | $164 (12%) |
| 10 | $1,331 | $1,023 (77%) | $307 (23%) |
| 20 | $1,331 | $713 (54%) | $617 (46%) |
| 30 | $1,331 | $90 (7%) | $1,241 (93%) |
Each row shows the first payment of that year.
Total paid: $479,017 Total interest: $279,017
Best for: People who want predictable, stable monthly payments. This is the standard mortgage method.
Downside: You pay the most interest overall because the principal balance decreases slowly.
Method 2: Equal Principal
How it works: You pay the same amount of principal every month, plus decreasing interest. Monthly payments start high and decrease over time.
Example: Same $200,000 at 7% for 30 years
| Year (first payment) | Monthly Payment | Interest Portion | Principal Portion |
|---|---|---|---|
| 1 | $1,722 | $1,167 | $556 |
| 10 | $1,372 | $817 | $556 |
| 20 | $983 | $428 | $556 |
| 30 | $594 | $39 | $556 |
Each row shows the first payment of that year.
Total paid: $410,583 Total interest: $210,583
Savings vs Equal Payment: $68,434 less interest
Best for: People whose income will stay stable or decrease (approaching retirement). Payments get easier over time.
Downside: Higher initial payments — first year is 29% more than Equal Payment method.
Method 3: Interest Only
How it works: You only pay interest for a set period (typically 5-10 years), then start paying principal + interest. Or you pay the full principal as a lump sum at the end.
Example: Same $200,000 at 7%, interest-only for 10 years, then 20-year amortization
| Period | Monthly Payment | What You're Paying |
|---|---|---|
| Years 1-10 | $1,167 | Interest only (principal unchanged) |
| Years 11-30 | $1,551 | Principal + interest |
Total paid: $512,143 Total interest: $312,143
Note: the calculator above can't reproduce this 10 + 20 structure. Its Interest Only mode assumes you pay only interest for the entire term and repay the full principal in one lump sum at maturity — over 30 years that means $420,001 in total interest.
Best for: Real estate investors who plan to sell before the interest-only period ends, or borrowers expecting significantly higher future income.
Downside: You build zero equity during the interest-only period, and total interest is the highest of all methods.
Method 4: Balloon Payment
How it works: Low monthly payments (often interest-only or partially amortized) with one large "balloon" payment at the end.
Example: Same $200,000 at 7%, payments based on a 30-year amortization, balloon due at year 5
| Payment | Amount | What You're Paying |
|---|---|---|
| Payments 1-59 | $1,331/month | Regular principal + interest, same as a 30-year loan |
| Payment 60 (balloon) | $189,594 | Remaining balance $188,494 + that month's interest $1,100 |
The regular monthly payment is $1,331 ($1,330.60) — exactly what a 30-year loan would cost — but after 59 payments the remaining balance comes due all at once.
Total paid: $268,099 Total interest: $68,099
Best for: Borrowers who are certain they'll refinance or sell before the balloon date. Common in commercial real estate.
Downside: Enormous risk. If you can't refinance or sell, you owe the entire balloon amount. Many borrowers hit the same wall around 2008 — though that foreclosure wave was driven mainly by subprime adjustable-rate mortgages resetting to higher payments just as home prices fell, which left borrowers unable to refinance or sell.
Side-by-Side Comparison
$200,000 loan at 7% for 30 years:
| Method | Monthly (Year 1) | Monthly (Year 20) | Total Interest | Risk |
|---|---|---|---|---|
| Equal Payment | $1,331 | $1,331 | $279,017 | Low |
| Equal Principal | $1,722 | $983 | $210,583 | Low |
| Interest Only | $1,167 | $1,551 | $312,143 | Medium |
| Balloon (5yr) | $1,331 | N/A | $68,099* | High |
*Balloon total assumes sale/refinance at year 5
How to Choose
| Your Situation | Best Method |
|---|---|
| Want stable, predictable payments | Equal Payment |
| Can afford higher initial payments | Equal Principal (saves the most) |
| Income will increase significantly | Interest Only (short term) |
| Will sell/refinance within 5 years | Balloon (if you're certain) |
| Just want to minimize total cost | Equal Principal |
| Standard home mortgage | Equal Payment |
| Investment property (short hold) | Interest Only or Balloon |
Extra Strategies to Pay Less Interest
Regardless of method, these strategies reduce your total interest:
The extra-payment savings below come from a month-by-month simulation. The calculator on this page has no extra-payment input, so you can't reproduce them there directly.
1. Make Extra Principal Payments
Even $100/month extra on a $200,000 mortgage at 7% saves about $63,000 in interest and pays off about 5 years 9 months early. This is interest avoidance working in your favor — every dollar of principal paid early reduces the balance that future interest is charged on. (For why the same dollar grows so much when invested instead, see compound interest explained.)
2. Biweekly Payments
Pay half your monthly payment every two weeks. You end up making 13 monthly payments per year instead of 12 — shaving years off the loan.
3. Refinance When Rates Drop
If rates drop 1%+ below your current rate, refinancing could save thousands. But factor in closing costs (2-3% of loan amount).
4. Round Up
Rounding $1,331 to $1,400 costs you $69/month extra but saves about $47,700 in interest and pays off the loan about 4 years 3 months early.
Key Takeaways
- Equal Payment is safest and most common — fixed, predictable monthly cost
- Equal Principal saves the most interest (up to 25% less) but starts with higher payments
- Interest Only is highest-risk for homeowners — you build no equity
- Balloon loans are specialist tools for short-term strategies, not long-term homes
- Extra principal payments, even small ones, dramatically reduce total interest
- Always calculate total cost, not just the monthly payment