2 min
19 December 2024
When you take a loan, calculating your EMI (equated monthly instalments) becomes crucial to managing your finances. But did you know there are different ways to calculate EMI? One of the most popular methods is the reducing balance method. Let us break it down in the simplest way possible, so you can understand how it works, why it is useful, and how it applies to home loans.
Imagine this:
EMI = [P x R x (1+R)^N] / [(1+R)^N - 1]
In this formula,
1. Loan amount (P): The amount you borrow from the lender. For example, Rs. 10,00,000.
2. Monthly interest rate (r): If the annual interest rate is 12%, the monthly rate will be 12%÷12=1% or 0.01.
3. Loan tenure (n): If your loan tenure is 5 years, it means 5 × 12 = 60 months.
Additional Read: Understand how the monthly reducing balance method works for home loan interest
Step 2: Calculate EMI using the formula.
Step 3: Understand the breakdown.
In the first month, the interest is calculated on Rs. 1,00,000. But in the second month, it is calculated on a reduced balance because you have already paid back part of the principal. This is how the reducing balance method ensures you pay less interest over time.
For example, if you take a Rs. 5,00,000 loan for 5 years at a 10% interest rate, you would pay significantly less interest with the reducing balance method than with the flat rate method.
Follow the simple steps below to calculate your monthly payments using the home loan EMI calculator offered by Bajaj Housing Finance:
1. High loan amount: Secure funding up to Rs. 15 crore* to turn your dream home into reality.
2. Low interest rates: Enjoy interest rates starting 8.25%* p.a, and EMIs as low as Rs. 741/lakh*.
3. Quick approval: Get approved within 48 Hours* of applying – sometimes even sooner.
4. Flexible repayment tenure: Choose a repayment term of up to 32 years for comfortable EMIs.
5. Simple application: Take advantage of doorstep document collection for a smooth process.
6. Balance transfer facility: Move your existing home loan and get a top-up loan with better terms.
Apply for a Bajaj Housing Finance Home Loan today.
What is the reducing balance method?
The reducing balance method calculates interest only on the outstanding loan amount, not the original amount borrowed. This means your interest burden decreases with each EMI payment, as a part of the principal amount gets repaid every month.Imagine this:
- You borrow Rs. 5,00,000 as a loan.
- Each month, you pay back some of the principal plus the interest on the remaining balance.
- As the balance reduces, the interest you pay also reduces.
Formula to calculate EMI in reducing balance method
The formula for EMI calculation is:EMI = [P x R x (1+R)^N] / [(1+R)^N - 1]
In this formula,
- P:is the principal amount
- R:is the monthly interest rate
- N:is the number of months
1. Loan amount (P): The amount you borrow from the lender. For example, Rs. 10,00,000.
2. Monthly interest rate (r): If the annual interest rate is 12%, the monthly rate will be 12%÷12=1% or 0.01.
3. Loan tenure (n): If your loan tenure is 5 years, it means 5 × 12 = 60 months.
Additional Read: Understand how the monthly reducing balance method works for home loan interest
How the reducing balance method works
Each EMI consists of two parts:- Principal repayment
- Interest on outstanding loan
- Loan amount: Rs. 1,00,000
- Annual interest rate: 12%
- Tenure: 12 months
Step 2: Calculate EMI using the formula.
Step 3: Understand the breakdown.
In the first month, the interest is calculated on Rs. 1,00,000. But in the second month, it is calculated on a reduced balance because you have already paid back part of the principal. This is how the reducing balance method ensures you pay less interest over time.
Benefits of the reducing balance method
- Lower total interest: You save money as the interest reduces with every payment.
- Encourages early repayment: The sooner you repay, the less interest you will pay overall.
- Perfect for long-term loans: This method is ideal for home loans, as the savings on interest can be significant over a longer tenure.
Comparing flat rate vs. reducing balance
It is easy to confuse the reducing balance method with the flat rate method. Let us compare:| Feature | Flat rate method | Reducing balance method |
| Interest calculation | On the entire loan amount | On the outstanding balance |
| EMI amount | Fixed throughout | Reduces over time |
| Overall interest | Higher | Lower |
For example, if you take a Rs. 5,00,000 loan for 5 years at a 10% interest rate, you would pay significantly less interest with the reducing balance method than with the flat rate method.
Why it matters for home loans
Home loans typically involve large amounts and long tenures, making the reducing balance method a smart choice. With this method, you are not just paying off the loan; you are saving on interest every step of the way. You can use an EMI calculator to estimate your monthly payments.Follow the simple steps below to calculate your monthly payments using the home loan EMI calculator offered by Bajaj Housing Finance:
- Enter your loan amount.
- Add the interest rate.
- Specify the tenure.
Why choose Bajaj Housing Finance for your home loan?
Whether you are buying your dream home or planning an investment, Bajaj Housing Finance Home Loan ensures your journey is stress-free and budget-friendly. Here are some benefits of opting for a Bajaj Housing Finance Home Loan:1. High loan amount: Secure funding up to Rs. 15 crore* to turn your dream home into reality.
2. Low interest rates: Enjoy interest rates starting 8.25%* p.a, and EMIs as low as Rs. 741/lakh*.
3. Quick approval: Get approved within 48 Hours* of applying – sometimes even sooner.
4. Flexible repayment tenure: Choose a repayment term of up to 32 years for comfortable EMIs.
5. Simple application: Take advantage of doorstep document collection for a smooth process.
6. Balance transfer facility: Move your existing home loan and get a top-up loan with better terms.
Apply for a Bajaj Housing Finance Home Loan today.
