Difference Between Annuity and Reducing Instalments

Aug 26, 2025

What is the Difference Between Annuity and Reducing Installments?

Both types of instalments are repayment plans that apply to principal and interest, but in different ways. They affect your monthly payment and the total amount paid over the life of the loan.

Annuity Instalments are often referred to as equal payments. This is because you pay the same monthly amount for the entire loan term.

Reducing Installments are also known as decreasing payments. This is because you pay significantly higher instalments at the beginning of the loan than at the end.

The easiest way to understand this is with an example. Let’s say you want to take out a €100,000 loan for 30 years at an annual interest rate of 2.50%. The repayment would look like this:

Annuity Instalments (Equal) Reducing Instalments (Decreasing)
Общ размер на всички вноски
~ 142 244 € ~ 137 604 €
The monthly amount will be the same throughout the term – about 395 €/month The first instalments will be around 483 €/month and will decrease over time, with the final one being around 278 €
Why is there a difference in instalments?
  • Initially, the monthly instalment pays interest primarily, with a smaller portion applied to the principal.
  • As time progresses, the interest portion decreases, and the share of the principal increases.
  • Each instalment contains a fixed part of the principal, while the interest decreases over time.
  • You begin repaying a substantial part of the principal right from the start.
Advantages:
  • You pay the same amount every month, making your budget planning easier.
  • The first instalments in an annuity plan are lower than those in a reducing plan, making the loan more accessible.
  • Preferred by banks because it is more profitable for them.
  • More convenient for the bank because you pay most of the interest at the beginning, meaning the bank receives more money early on when the risk is higher.
  • You pay more initially, but you end up saving a significant amount on interest.
  • More suitable if you have a higher income at the beginning of the period.
  • The total debt is reduced faster.
  • Suitable if you are looking for the lowest total cost of the loan.

 

Free consultation

 

Споделете

Submit a Comment