Two lenders quote the same rate and the same term, and the monthly payment is different. Nobody is cheating: they are offering different schedules. Which one costs less is easy to answer. How much less, and at what price, is the part worth reading.
Every figure below was computed with the same engine as our loan calculator and mortgage calculator. The rates are examples, not market data — put in your own and you get your own numbers.
Two ways to repay the same debt
An annuity keeps the payment identical every month. Early on most of it is interest; towards the end most of it goes to the debt.
A declining (differentiated) schedule repays the principal in equal parts and adds interest on what is still owed. The first payment is the largest, and each one after it is smaller.
A 20,000 loan over 3 years at 12%
| Annuity | Declining | |
|---|---|---|
| Monthly payment | 664.29 every month | from 755.56 down to 561.11 |
| Paid in the first year | 7,971.43 | 8,700.00 |
| Total interest | 3,914.30 | 3,700.00 |
The declining schedule saves 214.30 — 5.5% of the interest. In exchange it asks for 91.27 more in the first month and 728.57 more over the first year.
A 300,000 mortgage over 25 years at 7%
| Annuity | Declining | |
|---|---|---|
| Monthly payment | 2,120.34 every month | from 2,750.00 down to 1,005.83 |
| Paid in the first year | 25,444.05 | 32,615.00 |
| Total interest | 336,101.28 | 263,375.00 |
Here the saving is 72,726.28 — 21.6% of the interest. The price is steep: the first payment is 30% higher than the annuity, and the first year costs 7,170.95 more.
The gap grows with the rate and the term
The same 100,000 at different rates and terms. "Interest saved" is the declining schedule's interest compared with the annuity's:
| Rate | Term | Interest saved | First payment vs annuity |
|---|---|---|---|
| 6% | 5 years | 4.7% | +12% |
| 6% | 25 years | 19.3% | +29% |
| 12% | 5 years | 8.9% | +20% |
| 12% | 25 years | 30.3% | +27% |
| 20% | 5 years | 13.8% | +26% |
| 20% | 25 years | 37.8% | +19% |
On a short consumer loan the difference is small money. On a long mortgage it can be a year of income or more. Either way the saving comes from one thing: the debt shrinks faster, so there is less of it left to charge interest on.
The option most borrowers miss: an annuity plus extra payments
A declining schedule is, in effect, an annuity with compulsory early repayment in the first years. So we checked the obvious alternative on the same 300,000 mortgage: take the annuity, and for as long as the declining payment would have been higher, pay the difference on top as an early repayment that shortens the term.
The declining payment drops below the annuity in month 109, so the extra is paid for the first 108 months — 34,298.54 in total. The loan is gone in 238 months instead of 300, and the total interest is 237,156.24 — less than the 263,375.00 of the declining schedule itself.
Why less? After month 108 the declining borrower's payment keeps falling, while the annuity borrower keeps paying 2,120.34 and clears the debt years sooner. More important is what the annuity borrower keeps: the right to stop. If money gets tight in year three, they simply pay the ordinary instalment. The declining borrower has no such exit.
When the declining schedule is still the better pick
- You know you would not make the extra payments on your own. The compulsory version works precisely because it is compulsory.
- Your income is high now and expected to fall — before retirement, for example.
- Your lender charges for early repayment or sets a minimum amount, so the "annuity plus extra" route costs something.
When the choice is not yours
Not every lender offers both schedules, so ask which ones are available before comparing offers. Where both exist, remember what the lender measures against your income: the first payment. On the declining schedule it is the largest one, so the amount you are approved for can be smaller.
Compare total interest and the effective rate, not the monthly figure. A longer term always makes the payment look better and the loan cost more.
Check it on your own numbers
Open the loan calculator, enter your amount, rate and term, and switch between annuity and declining: the total interest changes on the spot. For the "annuity plus extra" route, the mortgage calculator takes a monthly early payment and shows how many months it removes.