# Reducing Balance Loan Calculator 2022

Usually, loans are repaid in EMIs or equated monthly instalments. The EMI that you pay depends on the outstanding balance that you have. As you pay off your loan, the outstanding principal will obviously reduce and the interest will be charged on the outstanding balance. Outstanding principal will be calculated using different time periods by different lending companies.

## Reducing Balance Loan calculation

The Reducing Balance Method is mainly used to calculate the total interest for housing or mortgage property loans wherein the interest to be paid by the customer is calculated based on the outstanding loan amount after periodic repayments. Being the preferred option compared to the Fixed Interest Rate, Reducing Balance Rate or the Diminishing Rate is used to calculate the interest amount for overdraft facilities and credit cards as well. This method is beneficial to the customers since they have to pay less amount of interest as the loan tenure progresses considering that the interest is calculated based on the outstanding principal loan amount. In this method, the interest decreases after each monthly installment is paid since the remaining balance becomes lesser than the previous month with the payment of each EMI. The depreciation rate percentage is applied on reducing balance of asset.

The formula for the Reducing Balance Method can be represented as,

Amount of interest for each installment = Applicable rate of interest * Remaining loan amount

Suppose, a customer takes a housing loan for Rs.40 lakh with 10% interest rate. The monthly EMI becomes Rs.38,601. Each EMI consists of a percentage of the principal amount that is to be repaid as well as an interest component.

Now, in first month, 10% is charged on the Rs.40 lakh. Out of the total EMI of Rs.38,601, the first month's interest component in the monthly installment is Rs.33,333 and the remaining Rs.5,268 goes towards repayment of the principal. So, at the end of the first month, the remaining balance becomes of Rs.39,94,732 (Rs.40,00,000 - Rs.5,268).

In the second month, 10% is charged on a reduced balance of Rs.39,94,732 and the interest of the EMI becomes Rs.33,289. The remaining Rs.5,311 goes towards the repayment of the principal amount and this continues in following months, till the repayment of the loan is fully completed.

Annual reducing loans use a method in which although the EMI is paid monthly, the adjustment towards principal and interest is made at the end of the year. This method does not work for the borrower’s interest since the lender continues to charge interest on the balance that was outstanding the earlier year even though the principal amount is getting reduced every month. Annual reducing loans are not as common as monthly reducing loans. Monthly reducing cycle, on the other hand, uses a method of calculation where the principal is reduced each time you pay an EMI, and the outstanding balance is used to calculate the interest. Most vehicle, home and personal loans are calculated on a monthly reducing basis.

Daily reducing method is also an option but not necessarily a most principal one. Basically it means that EMI is calculated on the outstanding balance each day. Since most people do not make daily payments, it effectively translates into a monthly reducing balance. Nevertheless, daily reducing cycle does come with its own benefits, particularly if you want to prepay a loan. Let’s take an example to illustrate this. Suppose your due date for EMI is on the 10th of each month, and you make the payment. If you would like to make a partial prepayment for the next month on 15th of the same month you can do so and benefit from it. That because if you have opted for a daily reducing balance, you will get the benefit of the prepayment immediately. The outstanding balance of your loan will get reduced on the 15th of this month instead of the 10th of the next month. In the monthly reducing cycle, your prepayment will be taken into account only when the next EMI is paid.

A borrower’s outgo is lowest in the daily reducing method. Annual reducing method makes the borrower pay almost double the interest one pays on a daily reducing cycle. It is not just the rate of interest that is affected but the cost of loan also depends on the frequency with which balance is reduced. The longer the term loan, the more relevant this becomes.

There are many online EMI Calculators you can use to calculate your EMI for a monthly reducing balance. All you have to do is insert certain information such as Interest Rate (%), amount of loan required, Tenure (in years) and whether the reducing Balance is based on daily, monthly or annual rests. Once this is put in, the EMI will be calculated for your information.

## Advantages of the Reducing Balance Method

• This method is simple to implement and easy to understand.
• For businesses, the amount which is charged to the profit & loss account towards depreciation and repairs remains somewhat uniform as the period of the loan progresses.
• The Reducing Balance Method is acceptable for income tax purposes. The depreciation tax deduction can be claimed in a larger amount.
• This method does match the cost and revenue of any business. The greater amount of depreciation during the initial years which is matched against the higher amount of revenue that is generated by the increased production by using a new asset.

## Disadvantages of the Reducing Balance Method

There are very few disadvantages of this method which are mentioned in the list below:

• The Reducing Balance Method charges a heavy amount of depreciation during the initial years.
• The rate of depreciation can only be calculated if there is some residual value of the asset.

It is always very important to know how to calculate the amount of interest for a loan product so as to learn how your loan will progress over the years and how much money you will be paying towards the interest of a loan. This is also helpful while comparing the loans through the Reducing Balance Method and the Fixed Interest Method and can help you make an informed decision depending on your situation. The Reducing Balance Method has more to offer than a Simple Interest Method but still its terms and conditions depend on the lender.

## Reducing Balance Loan Calculator FAQs

1. What’s the difference between flat interest rate and reducing balance rate?
2. Flat interest rate is calculated on the entire loan amount throughout the loan tenure. The reduced outstanding balance or principal amount due to payment of EMIs is not considered for flat interest rates. For this reason, the effective interest rate becomes higher than the rate offered. Flat rates are mostly offered on personal and vehicle loans.

Whereas, for reducing balance, the interest rate is calculated on the outstanding loan amount and on a monthly basis, after payment of EMIs. This considerably reduces the effective interest rate. Home loans, mortgage loans, credit cards, and overdraft facilities calculate rates based on the reducing balance method.

3. Should I opt for flat rate or reducing balance rate loans?
4. Both methods have their own set of advantages and disadvantages. Flat rates don’t fluctuate however the effective interest rate can go up considerably in case of this particular method. Whereas, reducing balance has a lower effective rate of interest due to reduced outstanding loan amount based on your monthly repayments, however the method can cost you heavy amount of depreciation during the initial years.

So, it’s best that you compare the overall cost of your loan by using an EMI calculator and see which one works for you best.

5. What’s the formula for calculating reducing balance interest rate?
6. The formula for calculating reducing balance interest rate is –

the interest payable (each instalment) = Outstanding loan amount x interest rate applicable for each instalment. So, after every instalment, your principal amount decreases, which in turn reflects on the effective interest rate.

7. Why is reducing balance rate always higher than the flat rate?
8. Though the quoted rate for reducing balance is usually higher than flat rate, the effective rate diminishes with time due to payment of EMIs. However, for fixed or flat rate loans, the outstanding amount isn’t considered, so the interest is calculated based on the actual/initial loan amount, and this increases the effective interest rate. To understand this better, compare your loan by using a reducing balance interest calculator and flat rate interest calculator.

## News About Reducing Balance Loan Calculator

• ### QR codes to be introduced by India Post Payments Bank to replace ATM and Debit Cards

The India Post Payments Bank was recently launched by the Prime Minister of India. The payments bank is set to replace ATM and debit cards with QR cards. These cards will be working using biometric authentication and cannot be used in ATMs or as a debit card. It is however possible to make cash withdrawals and transactions by using QR cards without the use of PINs or passwords. India Post Payments Bank will be offering three different types of savings accounts namely basic, digital, and regular. This is apart from the current account offered by the payments bank. India Post Payments Bank has also launched an app to help with mobile banking and also to open an aadhaar based account. The accounts launched by the payments bank will have an interest rate of 4%. A maximum deposit of Rs.1 lakh can be made and there is no option yet to avail loans. The unique QR code will help to identify the account holders. It is expected that transactions using QR cards will soon be available in small retail stores which includes small stores and merchants.

7 September 2018

• ### Andhra Bank’s MCLR to remain unchanged

Andhra Bank has decided to not change the marginal cost of fund-based lending rate of the bank across all the available tenors (one year, six months, three months, one month, or overnight). The marginal cost of fund-based lending rate of the bank that has been effective since 16 July 2018 will remain unchanged and will continue to remain at 8.55 percent. The lending rates were increased by 25 basis points by Reserve Bank of India, increasing from 6.25% to 6.50%. The increase in the lending rates was announced in the bi-monthly monetary policy statement of RBI for 2018-19.

10 August 2018

• ### NTPC signs agreement for a Rs.1,500 crore loan with HDFC Bank

India’s largest electricity generating company, NTPC today signed a loan agreement with HDFC for Rs.1,500 crore. The loan will run for 15 years and will bear an interest rate that will be linked to 3 months MCLR of the bank, the company conveyed in a statement. The loan will be used to partly finance the expenditure of NTPC. the loan deal was signed by the General Manager for Finance of NTPC and the Regional Head for Corporate Banking of HDFC Bank.

16 July 2018

• ### Punjab National Bank raises MCLR by 0.05% to 0.10% for select tenors

Public lender Punjab National Bank (PNB) has hiked its marginal cost of funds based lending rate (MCLR) by 0.05%-0.10% for fixed tenors. This step will translate to costlier loans for customers and came into effect from 1 June 2018. The MCLR for a loan of a 6-month tenor has been hiked by 0.05% to become 8.30%. There has been an increase of 0.10% for loans of 1, 3, and 5-year tenors making the new borrowing rates 8.40%, 8.55%, and 8.70% respectively.

No alterations were made in the rates of loans for 1 month and 3-month tenors. The bank also recently revised its base rate to 9.25% from the earlier 9.15%. On the Bombay Stock Exchange (BSE), the stocks of PNB showed a down of 2.96% at Rs.83.60 per unit.

6 June 2018

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