Equal principal or equal instalments, and why flat interest is neither
Two loans can share an interest rate, a term and a principal and still differ by nearly a billion dong, purely because of how the repayment is arranged. The method is usually one line on the offer sheet, often in the section nobody reads, and it deserves as much attention as the rate.
The three methods
Equal principal, interest on the reducing balance
The capital repayment is the same every month: the amount borrowed divided by the number of months. Interest is charged on whatever is still outstanding. The instalment therefore starts high and falls month by month, apart from the jump when the rate changes. This is the standard structure for Vietnamese home loans.
Equal instalments, the annuity
The bank solves for one fixed payment that covers interest and clears the balance by the end of the term. Early payments are mostly interest, later ones mostly capital. When the rate changes, the instalment is recomputed from the balance still outstanding and the months remaining.
Flat interest on the original principal
Interest is charged every month on the amount originally borrowed, regardless of how much has been repaid. It is standard for car finance and consumer credit and it appears on some home loan products. It is the reason a quoted rate must always be qualified.
The same loan, three ways
2.4 billion dong over 240 months, promotional 6.9% for twelve months, then 11.5% floating.
| Equal principal | Equal instalments | Flat | |
|---|---|---|---|
| First instalment | 23,800,000 | 18,463,387 | 23,800,000 |
| Instalment in month 13 | 31,850,000 | 25,324,671 | 33,000,000 |
| Jump at month 13 | +37.5% | +37.2% | +38.7% |
| Total interest | 2,663,630,000 | 3,595,585,609 | 5,409,600,000 |
| Total cost above principal | 2,678,630,000 | 3,610,585,609 | 5,424,600,000 |
| Effective rate | 11.392% | 11.509% | 16.233% |
| Required payment as a share of 55m income, at peak | 57.9% | 46.0% | 60.0% |
Equal principal against equal instalments: a genuine trade-off
Equal principal costs 931,955,609 dong less over the term. That is not because the bank is charging a lower rate; the effective rates are 11.392% and 11.509%, a difference of barely a tenth of a point. It is because under equal principal you are borrowing less money for less time. The balance falls in a straight line rather than hanging high through the early years.
What equal instalments buy you is room. The peak required payment is 25,324,671 dong instead of 31,850,000, which on a 55,000,000 dong household income is 46.0% of income instead of 57.9%. For a household near the edge of what it can service, that is the difference between a loan that works and one that does not, and no amount of long-run efficiency helps if the payments cannot be made in year two.
The decision rule that follows from this is simple enough to state in one line each:
- Choose equal principal if the month thirteen instalment, stress tested two points higher, still sits comfortably inside your budget. You will pay substantially less.
- Choose equal instalments if it does not, or if your income is lumpy, or if you want a predictable number to plan around. You are buying certainty and headroom, and the price is real.
- Choose equal instalments and overpay if you can do both. Overpaying 10,000,000 dong a month from month thirteen on the equal principal loan cuts total interest from 2,663,630,000 to 1,418,180,000 dong. The same discipline applied to an annuity closes most of the gap while keeping the low required payment as a floor you can drop back to. Check the overpayment clause first: many contracts charge the early repayment tier on it, which is covered in the early repayment fee.
Flat interest is not a third option, it is a different price
Under the flat method the interest in month 240, when nearly all of the loan has long been repaid, is the same as the interest in month thirteen. Over the term that produces 5,409,600,000 dong of interest against 2,663,630,000 on equal principal: more than double, at the same quoted rate.
The effective rate makes the size of the deception plain. A flat loan quoted at 6.9% promotional and 11.5% floating has an effective rate of 16.233% a year. As a rule of thumb, a flat rate is worth roughly 1.5 times itself as a reducing-balance rate on a twenty year loan, which means a flat 8% offer competes with a reducing-balance offer at about 12%.
The test is one question: is the interest each month calculated on the outstanding balance or on the original loan amount? Ask it in those words. If the answer is the original loan amount, the quoted rate is not comparable to any other quoted rate you have been given, and the offer needs repricing before it can be considered at all.
How to identify the method on the paperwork
| What you see | What it means |
|---|---|
| A schedule where the payment falls a little every month | Equal principal |
| A schedule with one repeated payment figure | Equal instalments |
| A schedule where the interest column is identical in every row, right to the end | Flat |
| Wording along the lines of “interest on the reducing balance” or “interest on the outstanding principal” | Equal principal or equal instalments; check the payment column to tell which |
| Wording along the lines of “interest on the original loan amount” or “interest on the initial principal” | Flat |
Always ask for the amortisation schedule as a file rather than a summary. It is the one document that cannot be ambiguous, and any bank can produce it in a few minutes. Run the same loan through the loan inspector on all three methods and compare the schedule against theirs, row by row; if the two disagree, one of you has misread the contract and it is worth finding out which.