Simplifying Loan Interest: What is reducing balance method?
Understanding loan interest can be tricky, but the reducing balance method offers an easy way to calculate and manage interest payments on your loans.
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Many banks and financial institutions offer reducing balance loans for housing loans. With this method, interest is calculated based on the remaining principal amount after each repayment. When you make an EMI payment, the outstanding loan balance decreases.
For example, if you pay monthly EMIs on your housing loan, the lender calculates interest on the reduced outstanding amount after each payment. This means the interest portion is highest at the beginning of the repayment cycle. As you make payments and the outstanding principal reduces, so does the interest portion in your EMI amount.
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Understanding loan interest can be tricky, but the reducing balance method offers an easy way to calculate and manage interest payments on your loans.
The reducing balance method, also known as the diminishing balance method, is a common way of calculating interest on loans. Unlike simple interest calculations, where interest is charged only on the principal amount, the reducing balance method recalculates interest periodically based on the remaining principal balance. This means that as you repay the loan, the interest is charged on the reduced outstanding balance, leading to lower interest payments over time.
When you take out a loan, the initial principal amount is set. Interest is
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