How do you calculate interest using the diminished balance method?
submitted by diwakar

renson

With the diminishing balance method, you take the current loan balance at the start of the period, multiply it by the interest rate, and that gives you the interest for that period.

Loan Balance x Interest Rate = Interest

Each time you make a payment, your balance drops, so the next interest calculation is based on the new, smaller balance. It should get smaller each time.

jake

Diminishing balance means less interest each payment. Take the amount you still need to pay and multiply it by the interest rate. That's your interest for that payment. Next time you pay, do the same thing. The interest amount will be less each time because it's being calculated from a smaller balance each time you pay.