How To Calculate Loan Monthly Reducing Balances Interest? – Number of time lender promote their loan products quoting Reducing Balance EMI.
This is the method used by Public Sector Bank for various loan products mainly MSME Business Loan, Overdaft, Housing loan, Credit Cards etc.
What exactly the Monthly Reducing Balance Method of EMI calculation ?
Calculation of Interest Payable Per Installment = interest rate per installment * Remaining Loan amount
How does this method benefited the borrowers. Check out the steps :-
In case of monthly resets, interest is calculated on the outstanding principal balance for that month
The Principal paid is deducted from the opening principal outstanding balance to arrive at the opening principal for the next month and interest is computed on the new reduced principal outstanding.
In case of annual resets, principal paid is adjusted only at the end of the year. Hence, you continue to pay interest on a portion of the principal that has been paid back to the lender.
Flat Method of Interest Calculation = Interest Payable per Installment = (Original Loan Amount * No. of Years * Interest Rate p.a. ) / Number of Installments