What is reducing balance?
Reducing balance means interest is calculated on the outstanding loan principal, which decreases after every payment.
Definition
In a reducing balance loan, each EMI reduces principal. Since the principal goes down every month, future interest is charged on a smaller balance.
Example
If your outstanding loan falls from ₹10,00,000 to ₹9,90,000 after a payment, next month’s interest is calculated on ₹9,90,000 (not on the original ₹10,00,000).
Use case
Use reducing balance understanding to compare loan offers and to evaluate how prepayments can lower total interest burden.