Short Answer 
To calculate the EMI using the reducing-balance method, understand the key variables such as principal amount, interest rate, and total number of payments. Apply the formula EMI = (P x I) x ((1 + r)^n) / (t x ((1 + r)^n – 1)), then compute and verify the EMI while considering any applicable fees and adjusting your budget accordingly.
Step 1: Understand the Variables
To effectively use the EMI reducing-balance method, familiarize yourself with the key variables that play a role in the calculation. These include:
- P: The principal amount borrowed.
- I: The annual interest rate on the loan.
- r: The periodic monthly interest rate (which is the annual rate divided by 12).
- n: The total number of monthly payments you will make over the loan’s term.
- t: The *number of months in a year*, generally 12.
Step 2: Apply the Formula
Utilize the following formula for calculating the EMI, which applies the reducing-balance method:
EMI = (P x I) x ((1 + r)^n) / (t x ((1 + r)^n – 1))
This formula calculates your monthly payments by considering the remaining balance on the loan. The term ‘reducing balance’ means that as you make payments, the interest charged will decrease because the principal owed becomes smaller.
Step 3: Calculate and Adjust Your EMI
Once you have plugged in the values into the formula, calculate the EMI. To ensure it’s correct, you may want to:
- Double-check all values for accuracy.
- Consider the total interest paid over the life of the loan to gauge affordability.
- Be aware of any fees or charges that might affect your total cost.
Finally, adjust your budget accordingly to accommodate the timely payment of your EMI.