Reducing Balance

An interest calculation method where interest is charged only on the outstanding principal balance. As payments are made, principal decreases and so does interest. Example: A market trader borrows KES 200,000 at 15% reducing balance over 12 months. In month one, interest is charged on KES 200,000. By month six, the balance is around KES 110,000, so the interest charge is nearly half what it was — saving her money compared to a flat rate loan.