Diminishing interest rate

Imagine being offered year loan at only Interest Rate. A diminishing installment rate is a mathematical percentage that is used for accounting purposes to depreciate an asset value on a declining basis over the estimated life of that asset. As opposed to a straight-line or equal installment metho the depreciation expenses are higher earlier in the life of the asset, but reduce as the asset ages and higher maintenance costs can be expected to be incurred. On the other han Flat Rate of Interest basically means that interest is charged on full amount of the loan throughout the entire loan period.

Reducing Balance Rate - 17.

You can observe that, for a flat interest rate of 10. For Example: if instead of p. Assume you have taken loan of 1at interest for yrs. Diminishing balance rate, EMI amount would be Rs 124. Whereas in Dimishing interest you will pay interest on the reduced balance.

As seen above interest is applicable on the reducing balance and not on the principal taken. The EMI depends on the amount of the loan, the interest rate and the term of the loan. It is an unequal combination of principal repayment and interest cost every month.

In the beginning, bank recovers their interest payments and gradually more of the principal repayment by the end of the loan tenure. The monthly interest rate is derived by dividing the annual interest rate by months. Then, subtract the monthly interest from the monthly amortization to get the amount that is applied to the principal.

In this metho the EMI includes interest payable for the outstanding loan amount for the month in addition to the principal repayment. After every EMI payment, the outstanding loan amount gets reduced. Flat Interest Rate is not same as ‘X p. New Balance = $10(1) - $5= $6after one month.

Note: Interest = $1(= $10x ). Principal = $4(=$5- $100). Below are some examples of how flat rate and reducing balance rates for the same loan amount and tenure. Click the first button to calculate the monthly repayments based on your original term.

Click the second button to calculate your reduced loan term and interest saving. Enter your additional monthly repayment. Recall, when using the same interest rate of per month on a $0loan, with the declining balance method the total interest rate was only $75. Although both loans state an interest rate of per month, the one using the flat interest rate calculation method in almost twice as much in interest payments for the client. Flat interest for years would be Rs.

Total amount to be repaid Rs.

Each perio you pay the amount of interest due plus a fixed amount for principal reduction. As a consequence, your payments decrease over time. Here, for example, the amount of the principal paid each period is equal to $100divided by 6 or $666.