If you have ever bought a car or house from a bank, chances are this reducing balance methods was used to calculate your repayments. The method is based on a mathematical formula for present value.
There are two variants to calculating installments namely the even installment variant or the even principal variant. The most common is the even installment variant. The even installment variant means the installment the SME would pay is always the same.
Reducing balance contracts are usually linked to prime rate or another floating rate. However, most financiers can facilitate fixed or non-floating rates
The basic workings of this method is that once an SME pays an installment. That a portion of the installment contributes to paying of the principal amount. The interest calculated for the new month will then be calculated on the new lower principal amount which the SME will owe at that time.
If you use the calculator you will notice that The interest for the month reduces, this is because it is based on the starting principal for that month.
Reducing balance calculator
| Month | Principal | Interest | Installment |
|---|