When taking out a loan or a mortgage, a bank sometimes lets you choose a payment schedule — annuity (level) or declining-balance. The difference affects both the size of your monthly payment and the total amount you pay in interest.
Annuity (level) payments
With an annuity schedule, the monthly payment amount stays the same for the entire loan term. But the mix of interest and principal within that payment shifts over time: early on, interest dominates the payment, while the share going toward principal grows closer to the end of the term. This is the most common schedule — a predictable, unchanging payment is easy to plan a budget around.
Declining-balance payments
With a declining-balance schedule, the principal is paid off in equal amounts each month, while interest is calculated on the remaining balance. Since that balance shrinks over time, the payment gets smaller month by month — it's noticeably higher than an annuity payment at the start of the term and lower by the end.
Which schedule costs less
At the same loan amount, rate, and term, the declining-balance schedule results in less total interest paid, because the principal is paid down faster — interest accrues on a shrinking balance right from the start. But the first payment is noticeably higher than with an annuity, which can be inconvenient on a tight monthly budget.