Fixed Principal Loan Calculator

How Fixed Principal Loans Work

Fixed principal loans are known by several names (fixed principal loan, declining balance loan, straight-line amortization), but they all refer to the same type of loan.

This is a type of loan in which the total interest paid is lower than for a standard annuity loan, which is an advantage for the borrower. The downside is that monthly payments vary, with the largest payments occurring at the start of the loan. Another advantage is that payments gradually decrease each month. Take a look at the amortization table and you’ll see for yourself.

Where This Loan Type Is Used

A reducing balance loan is most commonly found in personal loans and auto loans. The fixed principal repayment scheme can occasionally be found in mortgage lending. This is an exception to the rule, as mortgages are most often associated with annuity payments. However, some financial institutions may offer this type of home loan repayment.

Comparing with a Standard Loan

This calculator estimates a loan with fixed principal repayments. It shows the total amount you will repay to the lender, as well as the interest paid over the life of the loan. You can compare which option is more beneficial for you: a loan with fixed principal repayments or a standard annuity loan. Reviewing the amortization tables highlights the differences between these loan repayment types.

When comparing a loan with fixed principal repayments to an annuity loan at the same interest rate, loan amount, and term, you will notice that the total repayment amounts differ. The payment schedule demonstrates that, unlike the fixed monthly payment of an annuity loan, the payments on a loan with a fixed principal component decrease each month.

This happens because, in a fixed-principal loan, the total loan amount is divided into equal parts based on the number of periods specified in the loan agreement. Interest is then added to each payment, calculated on the remaining unpaid balance of the loan. As this balance gradually decreases, the interest portion also decreases, resulting in smaller total monthly payments over time.

Example for Comparing Total Loan Payments

Consider a hypothetical loan of $30,000 with a term of three years and an annual interest rate of 10.5%. The total repayment for a loan with fixed principal payments will be $34,856, of which $4,856 is interest. For a standard annuity loan with the same conditions, the total repayment would be $35,102, of which $5,102 is interest