Glossary

Reducing balance

Reducing balance means interest is charged only on the outstanding amount of a loan, so as you repay, the interest you pay each period falls.

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On the balanceInterest on what you owe

AmortisingCapital falls each period

Definition

Reducing balance (also called amortising or diminishing balance) is a method of charging interest where the rate applies only to the capital you still owe. Each repayment covers the interest due for that period plus a slice of the capital, and because the capital shrinks, the next period's interest is smaller. It is the standard, fairer basis for most business term loans.

In plain terms

Think of it like a mortgage: early payments are mostly interest, later payments mostly capital, and the total interest is far less than if you were charged on the full original sum the whole way through. It is the opposite of a flat rate.

Why it matters for your company

When you compare offers, a reducing-balance rate and a flat rate that look identical are not — the flat rate costs roughly double. Always check which method a lender uses, and read how loan interest is calculated.