Diminishing Balance-Based Interest Rate vs. Principal-Based Interest Rate. Why interest of 5% equals 2.5%?

Do you know that the interest rates you are looking at are not always what they seem? The difference lies on how they were calculated. What are the diffrent calculation methods? How are they computed? When borrowing money from banks or any financing company be wary of how they calculate the interest rates. After reading this article, you can learn how to calculate the risk more accurately.

Calculating Using Diminishing Balance-Based Interest Rate

Diminishing Balance-Based Interest Rate is also referred to as Reducing Balance Interest Rate or Effective Interest Rate. On the other hand, Flat Rate of Interest basically means that interest is charged on full amount of the loan throughout the entire loan period.

Calculating Using Principal-Based Interest Rate

This looks simple, but it is actually complicated. Currently, regardless of how much balance you have, we always calculate the interest rate from the amount you borrowed. So, in effect, we are doing calculations based on Diminishing Balance, and then adding up all the periods to give just the average interest rate. It is attractive that it looks easy to understand.

5% vs 2.5%

Diminishing Balance-Based Interest Rate

Borrowed Amount: P10,000
Interest Base: 5%
Term: 10 months

# Principal Interest Payment
1 10,000 500 1,500
2 9,000 450 1,450
3 8,000 400 1,400
4 7,000 350 1,350
5 6,000 300 1,300
6 5,000 250 1,250
7 4,000 200 1,200
8 3,000 150 1,150
9 2,000 100 1,100
10 1,000 50 1,050
0 - -
Total 2,750 12,750
Principal-Based Interest Rate

Borrowed Amount: P10,000
Interest Base: 2.5%
Term: 10 months

# Principal Interest Payment
1 10,000 250 1,250
2 9,000 250 1,250
3 8,000 250 1,250
4 7,000 250 1,250
5 6,000 250 1,250
6 5,000 250 1,250
7 4,000 250 1,250
8 3,000 250 1,250
9 2,000 250 1,250
10 1,000 250 1,250
0 - -
Total 2,500 12,500

4% vs 2%

Diminishing Balance-Based Interest Rate

Borrowed Amount: P10,000
Interest Base: 4%
Term: 10 months

# Principal Interest Payment
1 10,000 400 1,400
2 9,000 360 1,360
3 8,000 320 1,320
4 7,000 280 1,280
5 6,000 240 1,240
6 5,000 200 1,200
7 4,000 160 1,160
8 3,000 120 1,120
9 2,000 80 1,080
10 1,000 40 1,040
0 - -
Total 2,200 12,200
Principal-Based Interest Rate

Borrowed Amount: P10,000
Interest Base: 2.0%
Term: 10 months

# Principal Interest Payment
1 10,000 200 1,200
2 9,000 200 1,200
3 8,000 200 1,200
4 7,000 200 1,200
5 6,000 200 1,200
6 5,000 200 1,200
7 4,000 200 1,200
8 3,000 200 1,200
9 2,000 200 1,200
10 1,000 200 1,200
0 - -
Total 2,000 12,000

Summary

A popular interest calculation in the Philippines is the Principal-Based Interest Rate. It looks lower at first glance, but monthly interest rates change twice as much when converted to pure interest rates. Again, please take care when comparing interest rates. It's not enough just to know how much is the monthly interest, but you also need to know what method was used to calculate it.

By the way, Biscuits uses the notation of Diminishing Balance Interest Rate. The reason is that our loans are always free of charge and can be reimbursed early, so they change along the way, and the Principal-Based Interest Rate can not tell you the exact rate. We offer interest rates at 5%. It may be misunderstood that it is the same or higher interest rate than the 2.5% based on Principal Interest Rate but actually it's lower. We still use this computation though, because we feel that the borrower can control balance and also compute the correct repayment amount.

Contact Us

If you want to know how Biscuits can also help out your company, please do contact the Biscuits Team. You may email us at support@biscuits.ph, message us in Facebook or call/text us at 0917-636-9679, landline: 02-810-4507

Why should we install Bisucits to your company?

Now, it has become a standard for companies to provide financial support for employees as a good company. In particular, HMO and in-house loans are central support. However, internal loans are more financially and procedurally burdened than HMOs. However, the needs of employees are huge and can not be avoided. Biscuits is a service that takes on the burden in this way, making the company's risk almost zero, and it is possible to provide employees with a loan with a favorable interest rate in the Philippines.

For companies, everything is free, so please feel free to contact us from below.

Requirements
  • More than 12 employees
  • Company form only (currently, private business operators are not accepted)
  • Fees: Free
  • Required documents: Basic Bank require information
Click here for more details

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