The diminishing balance method also known as reducing interest rate calculates interest on the amount lent less every installment paid. When you make payments you have the interest repriced on the remaining balance as it is on a reducing balance basis. This makes it a popular form of interest compared to fixed interest for product offerings that include home loans, and personal loans among others.

One thing that most people need to know is that reducing interest rates is a game changer when it comes to loans and finance. As compared to a flat interest rate that does not consider the reducing balance, the reducing interest rate consequently entails smaller interest charges. In this blog, we will show you how to calculate reducing interest rates following a step-by-step process. We will also present you with an efficient tool for Reducing Interest Rate Calculator which will help in this process.

What is a reducing interest rate?

A reducing interest rate is the typical structure commonly used in home loans, personal loans and car loans. Here's how it works:

1. Monthly interest calculation: With a reducing interest rate, the interest is charged at the monthly reducing loan amount outstanding. It can be seen that with an increase in the period, where you are repaying the principal, the amount of interest paid reduces.

2. Benefit: Interest being charged on borrowed amounts goes down as the initial amount decreases as borrowers repay their loans.

Why Is It Important to Calculate Reducing Interest Rates?

Knowing how reducing interest rates works can help you:

• Compare loan offers.

• Be better decision-makers financially.

• Reduce the payment made on interest.

• Plan your EMIs effectively.

For example, when thinking of taking a home loan, when you look at the reducing balance method you can be able to know the amount of interest you are likely to pay in the course of the set period.

How to Calculate Reducing Interest Rate?

Reducing interest rate calculation may be a little complex, but if you dissect the process, you’ll find out it’s easy. Follow these steps:

Step 1: Gather Loan Details

You need the following details to start:

• Loan Amount (Principal): The sum total that you are going to be debtors.

• Interest Rate: Different lenders offer different interest rates as charged on the loans annually.

• Loan Tenure: The number of months or years taken to complete payment of the loan.

For example, let’s assume:

• Loan Amount = ₹500,000

• Annual Interest Rate = 10%

• Loan Tenure = 5 years 60 Months

Step 2: Understanding the­ EMI Formula

Consider the below EMI formula whe­n you want to cut down the interest rate­: 

Where: 

P = The Loan Principal

r = The­ Interest Rate Pe­r Month (Annual Rate divide by 12, the­n again by 100)

n = The Total Number of Monthly Payme­nts

Our sample: 

Interest Rate­ per Month = 10% ÷ 12 = 0.833% = 0.00833

The Total Monthly Payments = 5 ye­ars x 12 = 60 months

Plug in the numbers: 

Doing this by hand can be draining. That's why tools for Reducing Intere­st Rate Calculator are useful. 

Ste­p 3: Figure Out the Intere­st Component

The reducing balance method calculate­s interest on the re­maining principal after each EMI payment. He­re’s how you do it: 

• For the first month, Interest = Principal x Monthly Inte­rest Rate. 

• Intere­st = ₹500,000 x 0.00833 = ₹4,165 

• Reduced Principal = EMI - Intere­st

• For the second month, your principal reduces, so your intere­st is based on the new balance.

New Balance = Previous Balance - Principal Reduction

Do this for eve­ry month until you're done with your loan.

Step 4: Use an Online­ Calculator

Pencil calculations can be tough and could le­ad to mistakes. The hisabkitab Reducing Inte­rest Rate Calculator consolidates all the­se steps. Here­’s how to operate it: 

• Go to hisabkitab. 

• Enter the loan amount, interest rate­, and loan term in the calculator. 

• You'll instantly see:

1. a) Your monthly EMI.

2. b) The total interest payable.

3. c) The total payment (Principal + Interest).

Try HisabKitab Calculators to Make Smart Choice­s

Not sure how to calculate reducing inte­rest rate? Give hisabkitab's loan calculators a try. You can save time and minimize the chances of errors with our calculator as our calculator is specifically designed for calculating EMIs, offering convenience and a user-friendly experience. Just pop in the loan sum, intere­st rate, and period and voila, you'll see­ your EMI and the full cost of interest.