interest (reducing balance rate) for one year (12 months). To understand this, let’s take a simple example. Why EMI is less? Because of the way the interest calculation is done. How? Because they have to pay less EMI’s. Why in reducing balance method EMI is less?įor borrowers, reducing balance method is economical. EMI Calculator: Reducing Balance Loan Vs Fixed Interest Loan Reducing Balance Loan Calculator Principal Loan Amount (Rs.)įixed Interest Loan Calculator Principal Loan Amount (Rs.) Read more about what to do when EMI is high.Ĭonfused? Allow me to explain the reducing balance method of interest calculation using examples. As loan outstanding reduces each month, hence the borrower pays less interest each passing month. Why? Because unlike fixed interest method, here the interest calculation is done each month. Lower EMI: In reducing balance method, the EMI is lower than fixed interest method.Read more about whether to invest money or use it to prepay loan? Please note the difference in EMI between fixed (Rs.9,042) and reducing balance method (Rs.8,722). EMI calculation can be done using Excel’s PMT formula. Hence, we are using Excel to do the computation. Monthly EMI: In reducing balance method, interest calculation is complicated.Loan of Rs.1,00,00 taken interest (reducing balance) for 1 year. Let’s take the above example (in #1), but this time instead of interest rate being fixed, it will be reducing balance. Here we will understand the difference between ‘fixed rate’ and ‘reducing balance rate’. Read more about habits of people with high credit score. How many month the borrow has in hand? 12 months (1 year x 12 month). Monthly Payments (EMI): The borrower has to pay Rs.1,08,500 in equal instalments paid each month.Read more about how to identify a debt trap. Total Payment: The borrow has to repay the loan principal along with the interests for 1 year.Read about transfer of home loan for lower interest rates. But on downside, this simplicity makes the ‘fixed interest loans’ expensive for the borrowers. Interest Payable: The total interest payable calculation is simple.
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