Reducing Rate of Interest: Meaning, Formula and Worked Example

A reducing rate of interest — also called reducing balance or diminishing balance — means the lender charges interest only on what you still owe, not on what you originally borrowed. It is the basis on which almost every regulated loan in India is priced, and understanding it is the difference between reading a loan offer correctly and being talked into a costlier one.

Reducing rate of interest: the plain-English meaning

Suppose you borrow ₹50,000 and repay it over 12 months. After the first EMI, you no longer owe ₹50,000 — you owe a little less. On a reducing basis the lender recalculates interest on that smaller number for the second month, on a smaller number again for the third, and so on. The EMI amount stays the same each month, but its split changes: interest shrinks, principal grows.

The formula

• Monthly interest = outstanding principal × (annual rate ÷ 12).
• Monthly rate r = annual rate ÷ 12 ÷ 100. For 24% a year, r = 0.02.
• EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), where P is the loan amount and n the number of EMIs.
• Principal repaid in a month = EMI − that month's interest.

Worked example: ₹50,000 for 12 months at 24% a year

The monthly rate is 2%. The EMI works out to about ₹4,725. Here is how the first few months and the last month behave:

Notice the interest column: ₹1,000 in month one, ₹93 in the last month. That fall is the whole point of a reducing rate.

How this differs from a flat rate

A flat rate charges interest on the full original amount for the entire tenure, ignoring everything you have repaid. On the same ₹50,000 for 12 months, a 10% flat rate charges ₹5,000 interest regardless of the falling balance — which is why a flat quote of 10% is worth roughly 18.5% on a reducing basis over a year.

Why the reducing rate is not the same as your APR

APR bundles the reducing-balance interest together with the processing fee and any other mandatory charge, annualised. Two lenders can quote the same 24% reducing rate and still cost different amounts, because one charges a 2% processing fee and the other 4%. Always compare the APR printed in the Key Fact Statement, not the interest rate alone.

Where you will see the reducing rate on a Privena loan

Every Privena loan is priced on a reducing balance, and your Key Fact Statement shows the monthly rate, the APR including the processing fee, and the full EMI schedule with the interest and principal split for each month — before you accept anything.

Work out your own numbers

The EMI calculator shows your monthly payment and total interest on a reducing basis for any amount, rate and tenure. The 30-second eligibility check gives you an indicative amount and APR without affecting your credit score.