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What is calculating interest rates on decreasing loan balances? This method calculates interest based on the actual amount you owe after deducting the principal you have paid in previous months. The interest amount decreases gradually, along with the decreasing loan balance.
Understanding the formula for calculating gradually decreasing interest rates helps you know the amount you have to pay, aiding in better budget management.
Calculating Bank Interest Rates on Decreasing Loan Balances
Refer to the method of calculating interest rates on decreasing loan balances applied by many banks nowadays.
1. Formula for calculating interest rates on decreasing loan balances
You can apply the calculation of interest rates on decreasing loan balances according to the following formula:
Monthly principal = Loan amount / number of months to repay
Interest for the first month = Loan amount * interest rate
Interest for subsequent months = Remaining principal * interest rate
2. Some illustrative examples
Example 1:
When you borrow 10,000,000 VND, for a term of 1 year (12 months) then:
- In the first month, interest is calculated on 10,000,000 VND, and you have repaid 1,000,000 VND of the principal to the bank.
- In the second month, interest is calculated on 9,000,000 VND, and you further repay 1,000,000 VND of the principal.
- In the third month, interest is calculated on 8,000,000 VND because you repaid an additional 1,000,000 VND of the principal last month.
- Similarly, in the following months, interest will continue to be calculated in this manner.
Example 2:
You borrow 50 million VND from the bank for a 12-month term with an interest rate of 12% per annum.
- In the first month, applying the above formula, the remaining balance is: 50 million, interest = 50 million x 12%/12 = 500,000 VND.
- In the second month: You repay 5 million towards the principal, interest = (50-5) million x 12%/12 = 450,000 VND.
Example 3:
You borrow 30 million VND from the bank for a 24-month term (2 years) with an interest rate of 12% per annum.
Below is the repayment schedule along with the decreasing loan balance:
Above is how banks calculate interest rates on decreasing loan balances currently applied by many banks and lending institutions. If you have to choose a repayment method when borrowing money, you should calculate monthly income, repayment capability, risk when repaying based on decreasing loan balance interest rates, and it's best to discuss thoroughly with bank advisors about the calculation method to be more proactive in repayment.
Banks also apply the formula for compounding interest monthly. Depending on your choice, different interest calculation methods will be applied.
- More: Formula for compounding interest monthly
Furthermore, you should not overlook the bank interest rate information shared by Mytour to get the most useful and practical information.
Banks' decreasing loan balance interest rate calculation formula is being applied by most banks for the majority of customer deposits. Therefore, if you currently have 500,000, in order to apply the formula for calculating bank interest rates on decreasing loan balances above and quickly calculate the interest amount received, readers should refer to our article How much interest does 500,000 deposits in the bank earn.
