Skip to content

NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Debt Management and Loans

Under the reducing-balance method of calculating interest on a home loan, interest for each month is charged on which amount?

Under the reducing-balance method, interest is charged on the outstanding principal at the start of each period. Because every EMI repays some principal, the interest portion falls over time. Charging on the original sanctioned amount is the flat-rate method, which costs the borrower more.

  1. AThe original loan amount sanctioned
  2. BThe outstanding principal at the beginning of that periodCorrect
  3. CThe total of all EMIs payable over the tenure
  4. DThe average of the sanctioned and outstanding amounts

Explanation

In the reducing-balance method, interest is computed on the principal still outstanding. As EMIs repay principal, the interest component falls and the principal component rises. Charging interest on the original amount describes the flat-rate method.

Did you get it right without looking?

One question tells you little. A timed set on Debt Management and Loans shows your real accuracy, how long you take and where you lose marks.

Practise Debt Management and LoansFree diagnostic mock

More Debt Management and Loans questions