How Banks Calculating the Diminishing Balance Interest Rate on Loans
When calculating interest on loans, banks commonly employ the diminishing balance method. This method involves calculating interest on the outstanding loan balance, which decreases with each repayment. Unlike the flat rate method, where interest is fixed based on the initial loan amount, the diminishing balance approach ensures that borrowers pay interest only on the portion they still owe. This translates to lower overall interest payments over the loan term.
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