Non-blended payments
In a non-blended loan, the principal, which is the original amount borrowed, is divided into equal monthly amounts, and the interest, the fee charged for borrowing, is calculated on the outstanding principal balance each month.
This means the monthly interest amount declines over time as the outstanding principal declines. As a result, a non-blended loan results in less interest than a blended payment loan.
The table below outlines the key differences between blended and non-blended loans.
Blended loan vs non-blended loan
| Blended loans | Non-blended loans | |
|---|---|---|
| Monthly payments | Total monthly payments are fixed. Lower cash outflows initially. | Monthly payment decreases each month. Principal and interest are separate. |
| Flexibility | Only identical monthly payments. | Various payment options. Postponements and prepayments are also possible. |
| Total interest costs | Higher even if nominal rate appears lower | Lower, even if nominal rate appears higher. |
| Equity building | Equity builds more slowly because a larger portion goes toward interest rather than principal. | Equity builds faster as more of each payment goes directly towards reducing the principal balance. |
| Debt-to-equity ratio | Higher. | Lower. |
An example of non-blended payments
Below is an example of a $100,000 loan with a 12-month amortization, a fixed interest rate of 5% and equal monthly payments of principal + interest with a declining total payment. The principal payment stays the same each month, while the interest payments and total monthly payments decline.
