Fixed Instalment Method vs Diminishing Balance Method

Fixed Instalment Method
The fixed instalment method of calculating interest is a straightforward method of calculating interest. In this method, the interest is calculated on the entire loan amount, and the borrower has to pay a fixed amount of money each month, which includes both principal and interest. The amount of the instalment remains the same throughout the loan repayment period, irrespective of the amount of the principal outstanding.

Diminishing Balance Method
The diminishing balance method of calculating interest is a more complex method of calculating interest. In this method, the interest is calculated on the outstanding principal amount, which reduces each month as the borrower makes payments towards the loan. The borrower has to pay a fixed amount of money each month, which includes both principal and interest. However, the amount of the instalment varies each month, depending on the outstanding principal amount.

Differences between Fixed Instalment and Diminishing Balance Method
There are several differences between the fixed instalment method and the diminishing balance method, which are as follows:

1. Calculation of Interest - In the fixed instalment method, interest is calculated on the entire loan amount. In contrast, in the diminishing balance method, interest is calculated on the outstanding principal amount.

2. Amount of Instalment - In the fixed instalment method, the amount of the instalment remains the same throughout the loan repayment period, irrespective of the amount of the principal outstanding. In contrast, in the diminishing balance method, the amount of the instalment varies each month, depending on the outstanding principal amount.

3. Total Interest Paid - In the fixed instalment method, the borrower pays more interest over the loan repayment period compared to the diminishing balance method. In contrast, in the diminishing balance method, the borrower pays less interest over the loan repayment period compared to the fixed instalment method.

4. Loan Repayment Period - In the fixed instalment method, the loan repayment period is fixed, and the borrower has to pay the same amount each month. In contrast, in the diminishing balance method, the loan repayment period may vary, depending on the amount of the instalment paid each month.

In conclusion, both the fixed instalment method and the diminishing balance method have their advantages and disadvantages. It is essential to choose the method that suits your financial situation the best.

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