Loan Payment Types: Amortized vs Equal Principal vs Bullet
Summary (TL;DR)
In 2019 a friend showed me the amortization table he had punched into a pocket calculator for a 100M KRW, 30-year, 5% APR loan: total interest of “about KRW 93 million.” I re-ran the same inputs in a one-line Python script yesterday and got KRW 93.22 million. The drift over seven years was under 0.3%, because the math is fully deterministic — three inputs (principal, rate, term) and an amortization formula. What is not deterministic is the rest of his story: that same year he refinanced into a variable-rate bullet line, and when rates jumped in 2022 his monthly interest nearly doubled, adding more than KRW 300,000 to his fixed costs in a single billing cycle. The structure choice is less about “which has the lowest total interest” and more about “what shape of cash flow can you actually live with.”
Three common loan repayment structures look different on a spreadsheet and produce genuinely different lives. Amortized (equal total monthly payment) keeps your cash flow flat — you pay the same number every month — but interest is front-loaded, so the total interest you pay over the loan is the highest of the three. Equal principal (same principal chunk every month plus the interest on the remaining balance) starts high and falls every month; you retire principal faster, so total interest is lower, but you must be able to afford the early months. Bullet (interest-only monthly payments, with the entire principal due at maturity) gives you the lowest monthly outlay by far but concentrates the entire principal into one final payment and produces the most total interest over the life of the loan. None of these is universally better. The right choice depends on the stability of your monthly cash flow, your confidence in the plan that will retire the principal (refinance, sale, bonus), and the prepayment terms attached to the contract.
Background
A loan is a promise to return a principal amount plus interest over time. The amount of interest you pay depends on how much principal is still outstanding and for how long. That is the only truth you need to carry into every comparison: interest is charged on whatever principal is still in your hands on each period. All three structures obey the same rule; they differ only in how much principal they retire each month.
Amortized (the 원리금균등 structure in Korean banking, often called “equal installment” or “fully amortizing”) sets the monthly payment to a constant value M such that, over the loan term n, the principal is paid off exactly. The standard formula is M = P · r(1+r)ⁿ / ((1+r)ⁿ − 1) where P is the principal, r is the per-period interest rate, and n is the number of periods. Because early balances are high, a large share of each early payment is interest; later, as principal shrinks, the interest portion shrinks with it and the principal portion grows.
Equal principal (원금균등) divides the principal evenly across n months and adds, on top of that, the interest on the current balance. The first month you pay P/n + P·r; the second month you pay P/n + (P − P/n)·r, and so on. The total payment starts high and decreases linearly.
Bullet (만기일시), sometimes called “interest-only” or a “balloon” loan depending on the jurisdiction, charges interest on the full principal every period because the principal is not amortized at all. Monthly you pay P·r; at maturity you pay the entire P back in a single final installment.
Data / Comparison
Consider an illustrative 100 million KRW loan at 5% APR (≈0.4167% per month) over 30 years (360 months). All figures below are approximations for this hypothetical; your loan will differ.
| Structure | First month payment | Last month payment | Total interest (approx.) | Cash-flow profile |
|---|---|---|---|---|
| Amortized (원리금균등) | ≈ ₩536,800 | ≈ ₩536,800 | ≈ ₩93 million | Flat |
| Equal principal (원금균등) | ≈ ₩694,400 | ≈ ₩279,000 | ≈ ₩75 million | Steeply declining |
| Bullet (만기일시) | ≈ ₩416,700 | ≈ ₩100,416,700 (includes principal) | ≈ ₩150 million | Low monthly, huge balloon |
A few things to internalize from the table. Amortized and equal-principal finish at similar total cost in the same ballpark, but equal-principal is cheaper overall because you retire more principal earlier — interest is charged on a smaller balance for more months. Bullet is cheapest month to month but by far the most expensive in total, because the principal stays at its maximum for the entire term; the total interest is roughly equal to the full principal over the 30 years in this example.
Real-world Scenarios
Scenario 1 — Long-term home mortgage. Most households prefer amortized loans for a home they plan to keep for many years. KB Kookmin Bank’s KB Star Mortgage and Shinhan’s housing loan products both default to amortized at the 30-year tenor for the same reason — flat monthly payments are easier to budget against a steady salary, and the total-interest premium over equal principal is the price most borrowers willingly pay for predictability. Equal-principal works when the household expects its income to peak early and prefers front-loading the burden to pay less overall. On the same 100M KRW, 5%, 30-year case, equal-principal starts at roughly KRW 694,000 in month one and falls to about KRW 279,000 by the final month — a sloping cash flow that costs around KRW 75 million in total interest, roughly KRW 18 million less than the amortized version.
Scenario 2 — Short-term business or bridge loan. Bullet loans are common when the principal is expected to be repaid from a specific event: a property sale, a refinancing into a longer-term instrument, or incoming receivables. The minimal monthly cost lets working capital stay working; the balloon is acceptable because the exit is planned. The risk is precisely that the exit is planned, not guaranteed.
Scenario 3 — Refinancing decision. When rates fall, an existing amortized or equal-principal borrower can refinance into a lower rate. The calculation is straightforward in principle — compare total remaining interest under the current loan with total interest under the new loan plus any refinancing costs and early-repayment penalties — but the penalty clause is the most frequently underestimated term in the comparison. The standard Korean mortgage prepayment schedule is a three-year sliding scale: roughly 1.4% in year one, 0.93% in year two, 0.47% in year three, applied to the outstanding balance. On an 80M KRW balance in year one that is KRW 1.12 million wiped out at signing of the new loan. Even a 50 bp rate cut takes about two years to repay that penalty, and on a short remaining term the refinance can be a net loss — a scenario that surprises borrowers more often than it should.
Scenario 4 — Choosing between equal principal and amortized at origination. A household that can comfortably absorb the higher early payments of equal principal will save on total interest. A household on a tight budget, or one expecting income growth, often prefers amortized so the early years do not break the budget. A useful exercise before signing is to project both structures against your expected income for the next five to ten years; the structure that survives a realistic bad-luck scenario (a job change, a medical event, a family change) without forcing emergency measures is usually the right one, even if it costs a little more overall.
Scenario 5 — Adjustable-rate (variable) loans. All three structures can be combined with a variable rate that resets periodically. Amortized variable loans recompute the constant payment at each reset; equal-principal variable loans pass the rate change straight into the interest component; bullet variable loans change only the monthly interest figure. In every case, the scenario worth modeling is not “what if the rate stays where it is” but “what if it rises three or four percentage points over the next five years.” If that scenario makes the loan unaffordable, the product is not the right fit regardless of how attractive the opening rate looks.
Common Misconceptions
“Amortized is always better.” Only if predictability is what you value most. Amortized pays the most total interest of the three “pay-down” structures because principal retires slowly at the start. If you can handle the early months, equal principal is cheaper overall.
“Bullet loans are always risky.” Risky for whom, against what? A bullet loan is risky when the plan for the final principal is soft — a hoped-for refinance, an uncertain bonus. It is much less risky when the exit is hard: a property under contract, a short-term receivable, cash already set aside. Context decides, not the structure.
“Prepayment always helps.” Not if your contract includes a prepayment penalty — and many long-term mortgages do for the first several years. Read the clause before modeling aggressive payoff. A 1–2% penalty on a large balance can swamp the interest savings from an early payoff.
“The headline interest rate is the full story.” It is not. The effective cost of a loan includes origination fees, insurance requirements, prepayment penalties, rate-reset triggers for adjustable-rate products, and the opportunity cost of the principal you are servicing. Two loans with the same APR can produce very different outcomes. A small habit that pays out: before signing, check whether the disclosure quotes the effective annual rate (in Korea, 총비용유효이자율 / 실질연이자율) or the headline nominal rate. The same nominal 5% can shift cumulative 30-year cost by several million KRW depending on which definition the contract uses to compute interest accruals.
Checklist
- How stable is your monthly cash flow? Flat (amortized), declining-acceptable (equal principal), or minimized-monthly with a defined exit (bullet)?
- What is the plan for the principal at maturity for a bullet loan? Refinance, sale, cash on hand? Hard or soft?
- What does the prepayment clause say? Penalty percentage and term window.
- Have you priced the total interest, not just the monthly payment? Especially for bullet and long-term amortized loans.
- Is there a rate-reset or adjustable component? Model the worst-case rate path, not only the current rate.
- What is the opportunity cost? Money spent on debt service is money not earning in another investment.
Related Tool
The Patrache Studio loan calculator lets you compare all three structures side by side with your own principal, rate, and term, so the numbers above become your numbers. For borrowers thinking about long-term wealth rather than just debt, Compound Interest and the Rule of 72 explains the same exponential math from the saver’s side and is why early interest on an amortized loan feels so heavy. If the loan is denominated in a foreign currency, Exchange Rate Types: Mid-Market vs Cash vs Wire covers the extra cost layer that pure domestic loan math does not see.
References
- International Monetary Fund, general economic and finance publications — https://www.imf.org/en/Publications
- Federal Reserve, economic research — https://www.federalreserve.gov/econres.htm
- Any introductory corporate-finance textbook (Brealey/Myers/Allen; Bodie/Kane/Marcus) for the amortization derivation and time-value-of-money fundamentals.