How to Calculate Reducing Balance Loan

How to Calculate Reducing Balance Loan
Most consumer loans have fixed monthly payments.

Reducing Balance Loan Calculation

The interest payable per installment on a reducing balance loan with a fixed monthly payment equals the interest rate per installment times the amount currently owing on the loan. For example, if you make monthly payments on a loan with a 6 percent annual interest rate and the balance before the current month's payment is $30,000, the interest due equals 6 percent divided by twelve -- the number of months in a year -- times $30,000, which equals $150.00. If the loan has a fixed total monthly payment, the principal reduction portion equals the monthly payment minus the interest due.