1. What is Reducing Balance Interest?

Reducing balance interest is a method where interest is calculated on the outstanding loan balance at the beginning of each period. As you repay the loan, the interest amount decreases because it's calculated on a reducing principal amount.

2. How Does the Calculator Work?

The calculator uses the simple interest formula:

Where:

• \( Balance \) — Current outstanding loan amount
• \( Rate \) — Interest rate per period (in decimal form)

Explanation: The interest is calculated by multiplying the current loan balance by the periodic interest rate.

3. Importance of Interest Calculation

Details: Understanding how interest is calculated helps borrowers make informed decisions about loan repayment strategies and compare different loan products effectively.

4. Using the Calculator

Tips: Enter the current loan balance in dollars and the periodic interest rate in decimal form (e.g., 0.01 for 1%). The calculator will show the interest amount for that period.

5. Frequently Asked Questions (FAQ)

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

Q2: How often should I calculate interest?
A: This depends on your repayment frequency - monthly for monthly repayments, daily for daily reducing balance loans.

Q3: Why is my interest decreasing over time?
A: With reducing balance, as you repay principal, the balance decreases, so the interest calculated on that smaller amount also decreases.

Q4: Can I use this for credit card interest?
A: Yes, if your credit card uses daily reducing balance method, though you may need to adjust for compounding.

Q5: How can I reduce total interest paid?
A: Make larger or more frequent repayments to reduce the principal faster, lowering interest charges.