# How to Calculate Reducing Balance Interest Rate

Use a spreadsheet to create an amortization table to track a reducing balance loan.
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Calculating a reducing balance interest payment is simple and straightforward. The interest rate is stated within the loan agreement. This is applied to the loan principal, which continuously reduces as interest and principal payments are made. If the interest rate is stated as an annual percent rate and payments are made more than once per year, the interest rate must be adjusted to match the number of periods per year payments are made. For example, if the APR is 12 percent, and monthly payments are made, the monthly interest rate equals the APR of 12 percent divided by 12 months, or 1 percent.

## Amortization Table

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Consider an initial loan amount of \$1,000, at 2 percent interest per month for 6 months, with equal monthly installment payments of \$178.53 per month. In the first month, interest is equal to the balance of \$1,000 multiplied by 2 percent interest, or \$20. In Month 1, the installment payment of \$178.53 was allocated as: \$20 to interest and principal reduction of \$158.53.