Is a linear schedule always cheaper than an annuity?

Yes. With the same rate and term, total interest under a linear schedule is always lower because the balance falls faster. The price is higher early payments.

Why do banks usually offer annuities?

The equal payment is easier to plan and the starting payment is lower, so more people qualify. A linear schedule often requires a higher income.

How do I calculate the annuity payment?

Use A = P × i ÷ (1 − (1 + i)^−n). For example, €20,000 over 60 months at 5% a year gives €377.42 a month.

Can I switch schedule type later?

It depends on the contract. Usually the schedule can only be changed by refinancing or by agreement with the bank, so think carefully before signing.

Annuity vs Linear Loan Repayment: Which Costs Less?

When you take a home, consumer or car loan you are often offered a choice: repay it as an annuity or in a linear (equal principal) way. Both clear the loan in the same time but differ in the monthly payment and in total interest. This guide compares them using a real calculation.

How an annuity schedule works

With an annuity you pay the same amount every month. It has two parts: interest, charged on the remaining balance, and principal. At the start most of the payment is interest and only a little is principal. Over time the interest share falls and the principal share grows.

The monthly payment is: A = P × i ÷ (1 − (1 + i)^−n), where P is the loan amount, i the monthly rate (annual rate ÷ 12) and n the number of months.

How a linear schedule works

With a linear schedule you repay an equal slice of principal each month (P ÷ n) and pay interest on the remaining balance. As the balance falls so does the interest, so the total payment drops every month. The first payments are the largest and the last the smallest.

Example: €20,000, 5 years, 5% annual rate

Take a €20,000 loan over 60 months at 5% a year (monthly rate about 0.4167%).

Measure	Annuity	Linear
First payment	€377.42	€416.67
Last payment	€377.42	€334.72
Interest in month 1	€83.33	€83.33
Total interest	€2,645.48	€2,541.67
Total paid	€22,645.48	€22,541.67

How much you save and why

In this example the linear schedule saves €103.81 in interest. The reason is that the balance falls faster: after 12 months you still owe €16,000 under the linear schedule but €16,388.89 under the annuity. Repaying more slowly means interest is charged on a larger balance.

The gap widens with longer terms and higher rates. On a long mortgage the difference can reach thousands of euros.

How a payment splits into interest and principal

In the annuity schedule, month 1 interest is 20,000 × 0.4167% = €83.33, so €377.42 − €83.33 = €294.09 goes to principal. In month 2 the balance is €19,705.91, interest is €82.11 and principal is €295.32. Each month the interest share shrinks slightly.

In the linear schedule principal is always the same: 20,000 ÷ 60 = €333.33. The first payment is 333.33 + 83.33 = €416.67, and by month 30 interest is only €43.06, so the payment is €376.39. The linear payment drops below the annuity payment from month 30.

When to choose which

Annuity suits you if you want a stable, predictable payment and a lower starting payment: easier budgeting, and often easier approval because lenders test the payment against income.
Linear suits you if your income is comfortable at the start and you want to pay less interest, with payments falling over time.
If your income is unstable, the annuity is simpler to live with. If you can afford a bigger payment early on, linear is cheaper.

What else to check before signing

Compare not only the interest rate but also the total cost of credit and the annual percentage rate of charge (APRC), which includes fees and other costs. Check whether early repayment is allowed and what it costs.

If the rate is variable (for example tied to EURIBOR), the schedule can change during the loan. The figures here are illustrative and exclude insurance, administration or other fees. For a quick calculation use our loan calculator.