1. What is Reducing Balance Loan?

A reducing balance loan is a loan where interest is calculated on the outstanding principal balance. As you make payments, the principal reduces, and consequently the interest charged on subsequent periods also reduces.

2. How Does the Calculator Work?

The calculator uses the reducing balance formula:

Where:

• \( Interest_k \) — Interest for period k
• \( Balance_{k-1} \) — Loan balance at start of period k
• \( r \) — Monthly interest rate (annual rate ÷ 12)
• \( Principal_k \) — Principal paid in period k
• \( PMT \) — Fixed monthly payment

3. Importance of Amortization Schedule

Details: The amortization schedule shows how each payment is split between interest and principal, helping borrowers understand how their loan balance decreases over time.

4. Using the Calculator

Tips: Enter loan amount in KES, annual interest rate in percentage, and loan term in months. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between flat rate and reducing balance?
A: Flat rate calculates interest on the original loan amount throughout the term, while reducing balance calculates interest on the outstanding balance.

Q2: Why is my initial payment mostly interest?
A: In early payments, the outstanding balance is highest, so interest component is larger. Over time, principal portion increases.

Q3: How can I pay less interest overall?
A: Make additional principal payments or choose a shorter loan term to reduce total interest paid.

Q4: Are Kenyan loans typically reducing balance?
A: Most commercial loans in Kenya use reducing balance method, though some informal lenders may use flat rate.

Q5: How does compounding frequency affect the loan?
A: Most loans use monthly compounding, but daily compounding would result in slightly higher interest.