How to Calculate Loan Repayment on a Reducing Balance?

A reducing loan balance calculator calculates monthly loan installments based on the decreasing outstanding principal amount. As you make payments, the interest is computed on the remaining loan balance, resulting in lower interest costs over time. This is what reducing balance method of loan repayment means.

Where to Get Loan Repayment Calculator on Reducing Balance?

You can visit any bank and calculate your EMI but if you want to do it manually, here is the formula: Amount of interest for each installment = Applicable rate of interest * Remaining loan amount

Let's consider a loan of 100,000 INR with an annual interest rate of 12% for a tenure of 1 year (12 months). Using the Reducing Balance Method:

• Monthly Interest Rate (r) = Annual Interest Rate / 12 = 12% / 12 = 1% or 0.01 in decimal form.

For the first month,

• Interest = Applicable rate of interest * Remaining loan amount

• Interest = 0.01 * 100,000 INR = 1,000 INR

But yes, calculating loan repayment on reducing balance will be easier if you use bank’s EMI calculators. Here are some links to help you out:

• Axis Bank:

  https://www.axisbank.com/retail/calculators/personal-loan-emi-calculator

• SBI:

  https://homeloans.sbi/calculators

• HDFC:

  https://www.hdfcbank.com/personal/tools-and-calculators/personal-loan-calculator

You can visit the bank for further details or doubts and get exact details about it.

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I am planning to avail a home loan myself so I am trying to know all details about a home loan. Recently I was talking with one of my neighbors who works in the HDFC bank and got to know about the RBM or Reducing Balance Loan repayment method. A lot of people want to know what it is or know how to calculate loan repayment on a reducing balance  so let me share some information that might help you out. If you understand the concept things will automatically get clear so do not worry.

The RBM is a method that calculates interest payments based on the outstanding principal balance instead of charging a fixed interest amount based  on the original loan amount. If you are paying the debt or installments monthly, the effective interest rate will be different every month. 

How to calculate repayment of loan reducing balance?

There is a formula to calculate the reducing balance which is

If you are unable to understand this loan repayment calculator reducing balance formula follow another method. 

Divide the interest rate you are being charged by the number of payments you will make in a year, usually 12 months and then multiply the figure by the initial balance of your loan (the amount your borrowed)

By now you must have understood how to calculate loan repayment on a reducing balance.

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