1. What is the Reducing Balance Method?

The reducing balance method (also called standard amortization) calculates interest on the outstanding loan balance, which decreases as payments are made. This results in a larger portion of each payment going toward principal over time.

2. How Does the Calculator Work?

The calculator uses the standard amortization formula:

Where:

• \( P \) — Principal loan amount
• \( r \) — Monthly interest rate (annual rate ÷ 12)
• \( n \) — Total number of payments (term in years × 12)
• \( PMT \) — Monthly payment amount

Explanation: The formula calculates the fixed monthly payment required to fully pay off the loan over its term, with interest calculated on the remaining balance each period.

3. Importance of Loan Calculation

Details: Understanding your loan payments helps with budgeting and comparing different loan options. The reducing balance method is the most common for mortgages, auto loans, and personal loans.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate, and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How does this differ from flat interest rate loans?
A: Flat rate loans calculate interest on the original principal for the entire term, resulting in higher total interest payments compared to reducing balance.

Q2: What's included in the monthly payment?
A: The calculated payment includes both principal and interest. Taxes, insurance, or fees would be additional.

Q3: How can I pay less interest overall?
A: Make additional principal payments when possible, choose a shorter term, or negotiate a lower interest rate.

Q4: Why does most of my early payment go toward interest?
A: With more principal outstanding early in the loan, more interest accrues. This shifts toward principal as the balance decreases.

Q5: Can I see an amortization schedule?
A: This calculator shows the summary. For a detailed payment-by-payment breakdown, use a full amortization schedule calculator.