When you take a home loan, the way interest is calculated can make a significant difference to your overall cost. Banks and NBFCs generally follow one of two methods:
- Daily Reducing Balance
(Used by most PSUs and scheduled banks such as SBI, Canara Bank, Bank of Maharashtra, etc.)
- Interest is calculated on the outstanding principal every day.
- Any repayment or prepayment reduces the balance immediately, lowering interest from the next day.
- This method is borrower-friendly and ensures fairness.
- Monthly Reducing Balance
(Followed by some NBFCs and Housing Finance Companies)
- Interest is calculated on the outstanding principal once a month.
- Prepayments made during the month only reduce interest at the next cycle.
- This can result in a slightly higher interest burden compared to daily reducing.
How to Verify the Method
- Check the FAQs section on the bank’s or NBFC’s official website under “Home Loan.”
- Review your loan agreement, where the interest calculation method is clearly mentioned.