Reducing Balance
Also known as: Diminishing Balance, Declining Balance Method
Loan interest calculation method where interest is charged only on the outstanding principal amount.
Detailed Explanation
Reducing balance method calculates interest on the remaining loan balance after each EMI payment. As you pay down the principal, the interest component decreases while the principal component increases in subsequent EMIs. This method provides a true representation of borrowing costs and is mandatorily used for disclosure in India.
Related Calculators
Related Terms
Effective Interest Rate
True annual cost of borrowing calculated on reducing outstanding balance, also known as EIR or reducing balance rate.
Flat Rate Interest
Interest calculation method where interest is charged on the full original principal throughout the loan tenure.
EMI
Equated Monthly Installment - Fixed monthly payment for loans comprising principal and interest.
Amortization Schedule
Detailed breakdown showing monthly EMI split between principal and interest throughout the loan tenure.