Blended payment
Blended payments are a way of repaying a loan that sets equal monthly payments of principal and interest (blended) over an agreed-upon amortization period.
By contrast, in non-blended arrangement, the borrower pays back the same amount of principal each month, plus a steadily decreasing interest payment. This means the total amount paid each month is not equal—it actually declines over the amortization period.
With a blended payment loan the borrower will pay more total interest but get the advantage of predictable budgeting.
The table below outlines the key differences between blended and non-blended.
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 blended payments
In the example below, ABC Co. has a $100,000 loan with a 12-month amortization period and a fixed interest rate of 5%. As can be seen, the amount of interest paid gets lower over time, while the amount of principal paid increases. The payments are the same each month.
