Business & Finance Loans

How to Calculate Reducing Balance

By Business & Finance Last updated Friday, May/24/2024

1). Get the terms of your loan. For this example, a loan in the amount of $75,000, interest rate of 10 percent for 180 months with payments of $750 will be used.
2). Take the interest rate and divide it by the number of days in a year. Use 360 to simply the formula. This assumes every month has 30 days. The result is .0002777, which is now multiplied by the balance of $75,000 to yield $20.82. The amount of interest that accrues on a daily basis is $20.82.
3). Multiply $20.82 times the number of days between payments. For this example 30 days will be used. The finance charges for the month equal $624.82. Subtract the monthly finance charges from the payment of $750 to get the principal payment. The balance is reduced by $125.18. The new balance is $74,874.82, ($75,000 - $125.18).