All Topics / Help Needed! / Can someone explain “reducing balance” interest rate please?

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  • Profile photo of Lora4486Lora4486
    Member
    @lora4486
    Join Date: 2010
    Post Count: 28
    May 29, 2011 - 2:31 pm

    Sorry, know its a basic concept but i’m having trouble wrapping my head around it, does anyone know how to explain reducing balance interest rate?

    Thanks :)

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024
    May 29, 2011 - 9:57 pm

    Hi Lora

    I think you are getting confused with a Principal & Interest loan.

    Interest is charged on the reducing balance. This means with every repayment you repay a portion of the principal (Albeit small is repaid) and the amount of interest for the month is adjusted accordingly.

    As time goes on and the principal balance reduced (assuming interest rates remain constant) your monthly repayment will comprise more principal and less interest.

    Hope this clarifies the situation.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

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