How to Calculate Reducing Balance Loan?

Most of the people face with difficulty in calculating the loan interest rates. And, most of the time they will opt for the lower interest rate because it seems to suggest that the burden on a borrower will be less. However, this is not always the case because you might end up paying a higher amount of interest fees even the rate of interest on the loan is lower than some other loans. So, we need to consider carefully, and decide properly about selecting a particular personal loan with different kinds of interest rate calculation.

Reducing Balance Loan

Do you know what is reducing balance loan? Let say you take a RM100,000 loan at a interest rate of 10% for 20 years. You need to pay back the total amount of RM 231,605 which inclusive of the principal and 10% interest fees. Thus, you need to pay back RM11,580 every year. But, the loan will keep reducing over the years as you paid back RM11,580 every year.

With reducing interest rate, the interest is calculated monthly on the outstanding loan balance. For every month repayment, the outstanding loan amount will be reduced by the amount of principal repayment. So, the interest for next month is calculated only on the reduced outstanding loan amount this month.

Due to this reason, we can see that why there’re still many people prefer a slightly higher interest rate loan that is reducing balance in nature because they know that the cost will be lesser than what they would bear in case of a flat rate loan.

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