When signing a loan contract it is possible to choose between two repayment methods: 元金均等返済 Equal principal repayments and 元利均等返済 Equal Loan repayments (or Equal principal and interest repayments) Many first-time house buyers don’t think about different repayment methods and they usually choose equal monthly payments. Let’s compare the two methods to make a conscious decision.
元金均等返済 (Gankinkintouhensai) Equal Principal repayments:
In this method every month the same amount of principal payment is made. The total amount of monthly repayment (Principal + interest) decreases every month as the repayment progresses. The principal decreases faster as a bigger portion of the monthly repayment consists of the principal money. As a result total interest repayment is less in this method.
Disadvantage: Since initial payments are highest it is advised for people who have enough funds at the beginning. A higher monthly income is required to be approved for this payment method. Every month the repayment amount changes and it is difficult to plan and calculate.
元利均等返済 (Ganrikintouhensai) Equal Loan repayments:
Every month the repayment amount (principal + interest) is the same. It is easy to understand and plan your monthly payments. The first payments will be lower compared to the other method.
Disadvantage: Principal repayment is slower and as a result higher interest is paid.
Example: Borrowing amount: 50,000,000 yen
Interest rate: 1.5%
Period: 35 years
Equal Principle Repayment Method:
First-month repayment: 181,547 yen
Total interest paid: 13,156,108 yen
Equal Loan Repayment Method:
First-month repayment: 153,092 yen
Total interest paid: 14,298,491 yen
The difference in total interest repayment between the two methods: is 1,142,383 yen. Equal loan repayment is the common method to use but if your loan consultant agrees equal principal repayment can be a good method as well. Please note that some commercial banks may provide only one method. Keskin
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