Payments That Shrink Every Year

A step-down loan starts with a higher payment and reduces it by a set percentage each year — designed for borrowers whose income is expected to fall, or who want to front-load debt while earning more. The trade-off is exactly the reverse of a graduated payment: you pay more early, so the balance shrinks faster, and total interest usually beats a flat loan at the same rate. But watch the tail. If the annual reduction is steep and your balance is still large, the later payments can fall below the monthly interest — and the loan stops shrinking, leaving a balloon at term end. This calculator shows that balloon explicitly. As a rule, keep the reduction modest enough that every year's payment still exceeds the interest on the remaining balance.