Interest is not set by the rate — how the same ₩500M split by ₩81.39M

The same ₩500M. The same rate, the same 30 years. Yet one borrower pays ₩437.88M in interest and the other pays ₩356.49M. The gap is ₩81.39M. Nobody negotiated a lower rate or shortened the term. All that changed was the order of repayment.

It is one box on the form at the bank. Most people skip straight past it. Nobody explains what that box changes. Once set, it follows you for 30 years.

The first method is paying the same amount every month. ₩2.61M in the first month, ₩2.61M in the last. 360 identical payments. It makes budgeting easy.

But inside that ₩2.61M, the split between principal and interest keeps shifting. Break open the first month and ₩1.97M of the ₩2.61M is interest; the principal falls by only ₩630,000. More than three times as much went to interest as to principal. The ratio flips as the years pass, until the last month is almost all principal.

Because the principal stays outstanding for so long, the interest keeps accruing for just as long. Even if you plan to sell and repay after five years, a great deal of principal is still left. Over 30 years the interest paid is ₩437.88M. That is not much less than the amount borrowed. In total you repay ₩937.88M.

The second method is repaying the same amount of principal every month. Divide ₩500M by 360 months and that is ₩1.39M a month. Add that month's interest on top. So the first month is the heaviest: ₩3.36M. That is ₩760,000 more than the first method.

In return, the principal falls steadily from the very start. As the principal falls, next month's interest falls. So each payment gets a little lighter. Over 30 years the interest paid is ₩356.49M, and the final payment is under ₩1.4M.

Why do they split like this? Because interest attaches to the outstanding principal. At the same rate, principal that stays outstanding longer collects more interest. Paying the same amount every month repays only a little principal early on, so the principal lingers. That is why the comfortable option is the expensive one in total.

On a variable rate, the new rate applies to whatever principal remains. So the borrower who has already reduced the principal is less exposed when rates rise. This is not only a question of total interest.

Under both methods the total principal repaid is exactly ₩500M. Of course it is; the amount borrowed is the same. The only thing that differs is the interest, and interest is the sum of the time the principal was outstanding. The lender is not taking more; it is the cost of the time you took to repay the principal.

So is the falling method always better? No. The first question is whether you can pay ₩760,000 more in the first month. If you cannot, this method was never an option. It is not a preference. Your cash flow decides.

Here is where it is easy to confuse this with the previous episode. The stress rate is a rate added only when calculating your borrowing limit; not a single won of it lands on the interest you actually pay. The interest in today's episode is real money going out.

And the limit on what you can borrow is calculated on the same-amount-every-month basis. Choosing the falling method raises the first-month burden, which can reduce that limit.

Banks often have a default they recommend first. If you do not ask, the loan frequently proceeds on the same-amount-every-month basis. So this box is one you have to ask about first. Whether to add an interest-only period is decided in the same place.

Remember one thing. Interest is set by the outstanding principal, not by the rate. Find the repayment-method box on the form and check which one it is, then work out how much more you could pay in the first month. Those two numbers decide your total interest.