Amortization Equal Principal Payments

What are equal principal amortization payments?

Equal principal amortization, also known as the constant amortization method (CAM) or straight-line amortization, is a loan repayment schedule where the borrower repays an identical, fixed dollar amount of principal in every payment period. Because principal decreases by an equal amount each month, the outstanding loan balance shrinks quickly, causing periodic interest charges and total monthly payments to steadily decline over the life of the loan.

This repayment structure stands in contrast to conventional annuity-style mortgages and consumer loans, which maintain a fixed total monthly installment. If you need to analyze standard fixed-installment loans, compare your results with the amortization calculator or check monthly payment splits on the EMI calculator. For loans with custom compounding schedules, explore the advanced loan calculator.

The equal principal payment formulas

For an initial loan principal $P$, nominal annual interest rate $r$, periodic interest rate $i = r / 12$, and total scheduled payment periods $n$ (such as tenure in years multiplied by 12), the repayment values are determined by:

In each period $k$ (where $k = 1, 2, \dots, n$), the interest charge $I_k$ is calculated on the beginning balance of that period $B_{k-1}$:

The total payment for period $k$ is the sum of the constant principal payment and that period's accrued interest:

Because $B_{k-1}$ decreases by exactly $P / n$ each period, the monthly payment drops by a constant step size $\Delta\mathrm{PMT}$ every single month:

Total interest and lifetime cost

Because the interest charges form an arithmetic progression descending from $P \times i$ down to $(P / n) \times i$, the total interest paid across all $n$ periods has a closed-form solution:

The total cost of the loan is simply the original principal plus total interest: $\text{Total Cost} = P + I_{\text{total}}$.

Step-by-step worked example

Consider a loan of $12,000 at a 6.00% annual interest rate with a 1-year term (12 monthly payments):

• Monthly principal: $12,000 / 12 = $1,000.00 each month.
• Monthly interest rate: 6.00% / 12 = 0.50% (0.005).
• Month 1: Beginning balance = $12,000. Interest = $12,000 x 0.005 = $60.00. Total payment = $1,000 + $60 = $1,060.00. Remaining balance = $11,000.
• Month 2: Beginning balance = $11,000. Interest = $11,000 x 0.005 = $55.00. Total payment = $1,000 + $55 = $1,055.00. Remaining balance = $10,000.
• Month 12: Beginning balance = $1,000. Interest = $1,000 x 0.005 = $5.00. Total payment = $1,000 + $5 = $1,005.00. Remaining balance = $0.00.
• Total interest: $12,000 x 0.005 x (13 / 2) = $390.00.

Equal principal vs equal total payment (EMI)

Borrowers often debate whether to choose equal principal amortization or standard equal monthly installments (annuity loans). Here are the fundamental differences:

• Substantially lower lifetime interest: Because you pay down principal aggressively right from the start, the average outstanding balance over the term is much lower under equal principal payments. On a $300,000 30-year loan at 6%, equal principal saves over $76,000 in total interest compared to standard fixed-payment amortization.
• Faster equity accumulation: Homeowners and business owners build equity immediately at a constant rate, rather than seeing early payments absorbed by interest.
• Higher initial cash flow requirement: The first several years require larger monthly outlays. As payments diminish over time, the burden on monthly cash flow decreases.

Frequently asked questions