Level payment against declining payment
Same amount, rate, and term. See what each plan costs and when the cost shows up.
- Level plan: payment every month$1,580.17
- Level plan: total interest$318,861.22
- Declining plan: first payment$2,048.61
- Declining plan: last payment$698.21
- Declining plan: total interest$244,427.08
- Interest difference$74,434.14
Level payment vs declining payment
Both plans charge the same interest rate. The difference is how principal is paid back.
- Level payment (also called fixed payment): the payment never changes. Early payments are mostly interest, and the share going to principal grows over time. This is how most U.S. mortgages and car loans work.
- Declining payment (fixed principal): you repay the same slice of principal every month, plus interest on the balance. The payment starts high and falls every month.
Level payments make budgeting easy. A declining payment loan pays down principal faster, so the balance and the total interest are lower. To play with real loan numbers, see the amortization schedule calculator or the mortgage calculator.
Worked examples
| Term | Level payment | Level interest | Declining first payment | Declining interest |
|---|---|---|---|---|
| 5 years | $4,891.54 | $43,492.22 | $5,520.83 | $41,302.08 |
| 10 years | $2,838.70 | $90,643.93 | $3,437.50 | $81,927.08 |
| 15 years | $2,177.77 | $141,998.31 | $2,743.06 | $122,552.08 |
| 30 years | $1,580.17 | $318,861.22 | $2,048.61 | $244,427.08 |
On the 30-year loan, the declining plan saves $74,434.14 in interest but asks for $468.44 more in the first month. The longer the term, the bigger the gap between the plans.
Balance and payment over time
| Payment number | Level plan balance | Declining plan balance | Declining payment |
|---|---|---|---|
| 60 | $234,027.44 | $208,333.33 | $1,826.68 |
| 120 | $211,940.32 | $166,666.67 | $1,600.98 |
| 180 | $181,397.85 | $125,000.00 | $1,375.29 |
| 240 | $139,163.21 | $83,333.33 | $1,149.59 |
| 300 | $80,760.41 | $41,666.67 | $923.90 |
After 10 years, the declining plan has paid down $83,333.33 of principal and the level plan only $38,059.68. The declining payment falls below the level payment at payment 126, a little over 10 years in.
Which plan fits you
- A level payment is easier on a tight monthly budget, because the first payment is lower.
- A declining payment needs higher income at the start, but total interest is lower and the balance falls faster.
- If you can afford the declining first payment, you can often get a similar result with a level loan by paying extra each month. Try the extra payments tab in the amortization calculator.
- Most lenders in the U.S. offer level payment loans, so the declining plan is mainly a way to see the math.
Frequently asked questions
What is the difference between fixed payment and fixed principal?
A fixed payment loan charges the same total each month, while a fixed principal loan repays the same amount of principal each month plus interest, so the payment falls over time. On $250,000 at 6.5% for 30 years, the first starts at $1,580.17 and the second at $2,048.61.
Which costs less in interest, level payments or declining payments?
Declining payments cost less, because principal drops faster. On $250,000 at 6.5% over 30 years, interest is $244,427.08 versus $318,861.22 with a level payment, a $74,434.14 difference.
Why is the first payment higher with a declining payment loan?
The first payment includes a full slice of principal ($694.44 here) on top of interest on the whole balance. As the balance shrinks, interest and the payment shrink with it.
When does the declining payment fall below the level payment?
On $250,000 at 6.5% over 30 years, the crossover is at payment 126, a little over 10 years in. Use the Crossover month tab for your own loan.
What is a level payment loan called in the U.S.?
Lenders usually just say a fixed-rate loan with equal monthly payments. An amortization schedule shows how each payment splits between interest and principal.
Sources and review
- Standard amortization formulas for level payment and equal-principal loans