A Daily Reducing Balance Calculator is a financial tool used to determine the interest charged on a loan or credit facility where interest is recalculated daily based on the outstanding balance. This type of calculation is commonly used in loans, mortgages, and credit card payments.
By using this calculator, individuals and businesses can:
- Estimate daily interest payments on a loan.
- Track how payments affect the outstanding balance over time.
- Optimize loan repayment strategies to reduce total interest paid.
- Compare different loan structures and interest models.
Understanding daily reducing balance loans helps borrowers make informed financial decisions and manage debt more efficiently.
Formula of Daily Reducing Balance Calculator
For a Daily Reducing Balance loan, the interest for a given day is calculated using:
Interest = Outstanding Balance × Daily Interest Rate
Where:
- Outstanding Balance is the remaining loan or credit amount at the end of each day.
- Daily Interest Rate is calculated as:Daily Interest Rate = Annual Interest Rate / 365
After each payment, the outstanding balance decreases, and interest is recalculated based on the new balance.
Step-by-Step Calculation:
- Determine the Outstanding Balance – The remaining loan amount after previous payments.
- Calculate the Daily Interest Rate – Divide the annual interest rate by 365.
- Multiply the Outstanding Balance by the Daily Interest Rate to get the interest for the day.
- Adjust the balance after each payment to reflect the new principal amount.
A higher outstanding balance results in higher daily interest charges, while early or frequent payments reduce the balance faster and lower total interest paid.
Daily Reducing Balance Reference Table
The table below provides a sample calculation for a $10,000 loan at an annual interest rate of 10%, assuming no additional payments.
| Day | Outstanding Balance | Daily Interest Rate (10% / 365) | Interest Charged |
|---|---|---|---|
| 1 | $10,000 | 0.0274% | $2.74 |
| 2 | $10,000 | 0.0274% | $2.74 |
| 3 | $10,000 | 0.0274% | $2.74 |
| 30 | $10,000 | 0.0274% | $2.74 |
If a payment of $1,000 is make on day 31, the new balance will be $9,000, and the daily interest will decrease accordingly.
Example of Daily Reducing Balance Calculator
Scenario:
A borrower has a loan of $20,000 at an annual interest rate of 12%. Using the formula:
- Daily Interest Rate = 12% / 365 = 0.03288%
- Interest on Day 1 = 20,000 × 0.0003288
- Interest on Day 1 = $6.58
If the borrower makes a payment of $5,000 after 10 days, the new outstanding balance becomes $15,000, reducing future daily interest charges.
Most Common FAQs
This method ensures that interest is calculate on the remaining balance, leading to lower overall interest payments if payments are make early or frequently.
To minimize interest costs, consider making extra payments, paying more than the minimum required, or choosing shorter loan terms.
A flat interest rate loan calculates interest on the original loan amount, while a daily reducing balance loan charges interest only on the remaining balance, making it more cost-effective over time.