When taking out a loan, how the payment schedule is structured is often overlooked, even though this choice directly determines your monthly burden and your total interest cost. There are two main options: the annuity payment and the differentiated payment. In this article we explain how each one works, who each suits, and the difference in real figures.
What is an annuity payment?
With an annuity payment you pay the bank the same amount every month — the monthly payment does not change over the life of the loan. However, the internal structure of this payment changes: in the early months the larger part of the amount goes towards interest and a smaller part towards the principal. As the term progresses this ratio reverses, and an increasing share is directed towards paying down the principal.
What is a differentiated payment?
With a differentiated payment the principal is divided into equal parts and each month you repay the same amount of principal. Interest, however, is calculated on the remaining debt, so it is high in the early months and gradually decreases. As a result the monthly payment is larger in the early months and declines month by month. Although the first payments feel heavier, the total interest is usually lower than with an annuity.
Comparison with real figures
Suppose you take out a loan of 12 000 manat at an annual rate of 18% for 24 months. With an annuity you pay roughly the same amount every month — on average 599 manat — and by the end of the term the total interest is about 2 376 manat. With a differentiated schedule the first month's payment starts at about 680 manat, while the final month falls to 507 manat; the total interest drops to about 2 250 manat. The difference may not look large, but as the amount and term grow it becomes noticeably bigger.
| Indicator | Annuity | Differentiated |
|---|---|---|
| First monthly payment | Moderate, fixed | Highest |
| Last monthly payment | Stays the same | Lowest |
| Total interest | Slightly higher | Slightly lower |
| Budget planning | Easy, payment is fixed | Harder, payment changes |
Who is each suited to?
An annuity payment is convenient for people with a stable income who want to know exactly how much they will pay each month. Budgeting is easy because the figure does not change. A differentiated schedule, on the other hand, is advantageous for those who can comfortably handle larger payments in the early months and want to minimise the total interest.
- Stable, moderate income: an annuity is more convenient and predictable.
- Strong income in the early months: a differentiated schedule saves on total interest.
- Large long-term loan: the interest advantage of the differentiated option is more visible.
- Planning to pay off early in the future: the debt decreases faster with a differentiated schedule.
What to watch for when choosing?
First of all, ask for the total amount to be repaid under both options — the monthly figure alone can be misleading. Then check whether the payments of the early months fit your budget; with a differentiated schedule the initial payment may turn out higher than you expected. Some banks offer only one option, so before comparing, clarify whether you even have a choice.
Conclusion
An annuity offers convenience and stability, while a differentiated schedule offers savings on total interest — the right choice depends on your income flow and preferences. Compare the total cost of both schedules and choose the one that suits you. To calculate the monthly payment in advance and compare the options, you can use our consumer loan page.
