Equal instalments vs equal principal: which repayment method suits you?

When you take out an instalment loan, the repayments are usually structured in one of two ways: equal instalments or equal principal. Many people have heard that "equal principal saves interest", but few know how much it actually saves, what it costs in return, or whether it matters at all if they plan to settle early. In this guide we take a RM 30,000 loan and work through both methods month by month. We then compare the saving with two levers that usually matter more: the length of the loan and paying down part of it early.

How the two methods work

Equal instalments (also called an annuity or equal monthly instalment): you pay the same amount every month. In the early months, a larger share of each payment is interest and a smaller share is principal (the amount you borrowed). Over time, the principal share grows.

Equal principal: you repay the same amount of principal every month, and interest is added on top, calculated on the remaining balance. The first payment is the largest, and each payment after that is a little smaller.

In both methods, interest is charged the same way: remaining balance × monthly rate. This is called reducing-balance interest. Neither method charges you "extra" interest. The only difference is the pace at which you repay the principal. With equal principal, you pay the balance down faster in the early months, so on average you are borrowing less money, and the total interest is lower.

Think of it like this: equal principal is "heavier at the start, lighter towards the end", while equal instalments are "the same weight every month".

Do not confuse equal instalments with a flat rate. A flat-rate loan also has a fixed monthly payment, but its interest is worked out on the original amount for the whole term, so it costs more than the headline rate suggests. Our guide on flat rate vs effective rate explains the difference.

A RM 30,000 example, month by month

Suppose you borrow RM 30,000 at 4.9% a year over 36 months. The monthly rate is 4.9% ÷ 12 ≈ 0.408%.

All figures in this guide follow the method used by the calculators on this site: monthly rate = annual rate ÷ 12, each payment and each month's interest rounded to the sen, and the final payment clears whatever balance is left. The equal-principal figures use the same rounding.

Equal instalments

The instalment formula is: instalment = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), where P is the loan amount, r is the monthly rate and n is the number of months.

• Monthly instalment: RM 897.78 (the last one is RM 897.82 because of rounding)
• Month 1: interest = RM 30,000 × 4.9% ÷ 12 = RM 122.50, so RM 775.28 goes to principal
• Month 12: interest RM 86.96, principal RM 810.82
• Month 36: interest RM 3.65, principal RM 894.17
• Total interest over 36 months: RM 2,320.12

Equal principal

• Principal each month = RM 30,000 ÷ 36 = RM 833.33 (the last month is RM 833.45, to absorb the sen left over from rounding)
• Month 1 payment = RM 833.33 + RM 122.50 = RM 955.83
• Each later payment falls by about RM 3.40, because the balance drops by RM 833.33 and 0.408% of that is about RM 3.40
• Final payment: RM 836.85
• Total interest over 36 months: RM 2,266.26

Equal principal saves RM 53.86 in total interest. In return, your first payment is RM 58.05 higher, and over the first 12 months you pay RM 11,245.38 instead of RM 10,773.36: RM 472.02 more cash in year one. The two methods only cross over at month 19, when the equal-principal payment drops below RM 897.78.

At a fairly low rate, then, the saving is modest. The more important question is whether your monthly cash flow can carry the heavier early payments comfortably.

At higher rates, the gap widens

The same RM 30,000 over 36 months, at three different annual rates:

At 12% a year, total interest is RM 5,871.48 with equal instalments and RM 5,550.00 with equal principal, whose final payment is RM 841.78. The higher the rate and the longer the term, the more equal principal saves in total, and the heavier the early payments become.

If you settle early, the method matters even less

Most of the saving from equal principal builds up in the later months. If you expect to settle the loan early, for example when a bonus or another lump sum comes in, much of the difference never appears.

Using the 4.9% example, interest paid in the first 12 months is RM 1,258.19 with equal instalments and RM 1,245.42 with equal principal: a difference of RM 12.77. If you settled in full right after the 12th payment, you would owe RM 20,484.83 under equal instalments against RM 20,000.04 under equal principal. That extra RM 484.79 is not an extra cost: it is principal you simply had not repaid yet, because you paid RM 472.02 less in the year. Either way, the interest you avoid by settling is the bulk of what was left.

You can get most of the saving with a fixed instalment

AXAI Credit loans use equal instalments on a reducing balance. Your instalment stays the same every month, interest is charged only on what you still owe, there is no early settlement penalty, and no processing or admin fees are added on top.

That combination lets you choose when to pay down principal faster, instead of being locked into high payments from day one. On our loans, a partial prepayment (minimum RM 1,000) goes straight to the principal, and the remaining instalments are recalculated over the same remaining months: your instalment goes down and the end date stays the same. Here is the idea in numbers, using the site's early settlement calculator, which works the same way:

• RM 30,000 at 4.9% over 36 months. After the 12th payment, you pay an extra RM 3,000. The remaining 24 instalments drop from RM 897.78 to RM 766.30, and you save RM 155.51 in interest. That is nearly three times the RM 53.86 you would save by choosing equal principal for the whole loan.
• RM 30,000 at 4.9% over 60 months. The same RM 3,000 after 12 payments cuts the instalment from RM 564.76 to RM 495.81 and saves RM 309.75, compared with RM 149.54 for equal principal over the same 60 months.

These examples assume you prepay right after an instalment. If you prepay between instalment dates, interest for the days since the last due date is charged on the prepaid amount only, so the figure changes slightly. Your adviser gives you the exact amount before you pay. Our prepayment guide covers the details.

The bigger lever: the length of the loan

Repayment method changes total interest by a few hundred ringgit. The term changes it by thousands. AXAI Credit's personal loan is priced at 4.9% a year for every term from 3 to 108 months (the same for every approved customer), so the only thing that changes below is the length of the loan. Here is RM 30,000 at each term:

Going from 36 to 24 months saves RM 764.95 in interest but adds RM 417.02 to every instalment. If you can afford a higher payment, a shorter term usually saves far more than switching repayment method would. If you cannot, a longer term with prepayments when cash comes in gives you a safety margin and a way to cut the cost later. Current pricing for each product is listed on our rates page.

Check affordability before you choose

Whatever the method, start with the payment you must make in the hardest month.

1. Add up your existing monthly commitments: car loan, PTPTN, credit card minimums, other instalments, and any buy now pay later plans.
2. Add the new payment. For equal principal, use the first (largest) payment, not the average.
3. Divide by your net monthly income (after EPF, SOCSO and tax deductions). This is your debt service ratio, or DSR.

Our affordability tool uses 40% of net income as a comfort reference line. It is a guide only, not an approval rule. As an illustration, with no other debts, the RM 897.78 instalment in the 4.9% example stays within 40% from a net income of RM 2,245. The RM 955.83 first payment under equal principal needs RM 2,390 or more. Our guide to DSR explains the ratio in more detail.

If part of your pay comes from commission, overtime or a year-end bonus, test the payment against your leaner months, not your best ones. If the numbers only work by cutting your emergency savings to zero, borrow less, choose a cheaper option such as using savings for part of the cost, or wait.

Which one should you choose?

Equal instalments tend to suit you if:

• Your income is steady but not generous, and you want a fixed amount that is easy to budget for
• You are early in your career or have heavy household commitments, so cash is tighter now than it may be later
• You expect irregular extra cash (bonus, side income) and would rather prepay when it arrives than commit to it up front

Equal principal tends to suit you if:

• Your income is comfortable now and you can handle the higher early payments without touching your emergency fund
• Your income is likely to fall later (for example, nearing retirement), so a lighter end suits you
• You care most about total interest and are not likely to settle early

A simple test: first make sure the largest payment fits your budget, then compare total interest.

Common mistakes

• Comparing methods at different rates. Equal principal at 12% costs RM 5,550.00 in interest on our example; equal instalments at 4.9% cost RM 2,320.12. The rate matters more than the method.
• Looking only at the first payment. A low first payment can come from a long term that costs far more overall. Always ask for the total interest.
• Assuming any fixed payment is a fair one. A flat-rate loan has fixed payments too, but costs more. Ask whether interest is on the reducing balance.
• Stretching the term "just to be safe" and never prepaying. A longer term is only cheap if you actually pay it down when you can.
• Ignoring prepayment rules. Some lenders charge for early settlement. Check before you sign.

Questions to ask before you sign

• Is interest calculated on the reducing balance or on the original amount?
• What is the annual rate, and what is the total interest over the full term?
• Can I see the full repayment schedule, month by month?
• Is there any fee or penalty for partial prepayment or early settlement?
• Are any fees deducted from the payout or added to the loan?

What to do next

1. Run your numbers in the affordability tool using the largest payment you would face.
2. Try a shorter and a longer term, and note the total interest of each.
3. Use the early settlement calculator to see what a realistic prepayment, such as part of your bonus, would save.
4. If you apply, ask your adviser on WhatsApp to walk you through the repayment schedule before you sign.

Summary

Equal instalments give you a fixed monthly payment with less pressure early on. Equal principal costs less interest overall, but starts with higher payments. For RM 30,000 over 36 months, it saves RM 53.86 at 4.9% a year and RM 321.48 at 12%. The term you choose, and whether you prepay when you can, usually matter much more than the method. Choose based on whether your cash flow can comfortably handle the payments first, and on interest savings second. Borrow only what you need, and remember that paying on time is always the cheapest strategy. If you have questions, call 011-2102 9366.

This article is general information only and is not personal financial advice. Approval and loan amounts are subject to assessment and your loan agreement. How we write and check our guides