5.2.3.4 Amortization Type

You need to specify the amortization applicable to the drawdown only if the schedule type is Amortized. The following options are available:

• Reducing Balance: The reducing balance method is used for calculating interest on the reduced principal/outstanding balance for each repayment schedule. The principal repayment would be the difference between the equated monthly installment and the interest, for each schedule.
• Rule of 78: This method is used to determine how much of each monthly payment is paid towards interest and how much is paid towards the principal component. First, you compute the total interest on the original principal amount. Then, you divide this interest amount equally into n parts, where n is the number of schedules and divide the loan principal amount also into n equal parts, so that each equal installment is basically a sum of the two. Subsequently, you apply the rule of 78 to calculate how much of the EMI goes towards interest and principal.

Examples:

Case 1: Reducing balance

Assume that you have disbursed a drawdown with the following details.

• Principal – 10,000 USD
• Interest Rate – 10%
• Interest Calculation Method – Actual/360
• Start Date - 12/1/2000
• End Date - 11/30/2001
• Days in the year – 364

Based on the reducing balance method, the interest, principal and the EMI is as follows:

SI. No.	Interest	Principal	EMI	Outstanding Bal
1	86.11	$793.05	$879.16	$9,206.95
2	79.28	$799.88	$879.16	$8,407.07
3	65.39	$813.77	$879.16	$7,593.30
4	65.39	$813.77	$879.16	$6,779.53
5	56.50	$822.66	$879.16	$5,956.88
6	51.30	$827.86	$879.16	$5,129.02
7	42.74	$836.42	$879.16	$4,292.60
8	36.96	$842.20	$879.16	$3,450.40
9	29.71	$849.45	$879.16	$2,600.95
10	21.67	$857.49	$879.16	$1,743.46
11	15.01	$864.15	$879.16	$879.31
12	6.11	$873.05	$879.16	$6.26

The interest for the first schedule is computed on the loan principal (10,000) for the first month (31 days) using the following formula:

(10000 * 10 * 31) / (100*360)

Interest for the subsequent schedules are computed on the outstanding principal for each schedule.

Case 2: Rule of 78

Consider the drawdown details mentioned in case 1.

Total interest on the loan = (10000 * 10 * 364) / (100*360) = 1011.11

Interest for each schedule = 1011.11/12 = 84.26

Principal for each schedule = 10000/12 = 833.33

EMI = 833.33 + 84.26 = 917.59

First month’s interest = 12/78 times $1011.11 = 155.56

(78 is the sum of integers from 1 to 12)

Therefore, principal for the first month = 917.59 – 155.56 = 762.03. The interest, principal, and EMI due for each schedule is as follows:

SI. No.	Interest	Principal	EMI
1	155.56	762.03	917.59
2	142.59	775.00	917.59
3	129.63	787.96	917.59
4	116.67	800.92	917.59
5	103.70	813.89	917.59
6	90.74	826.85	917.59
7	77.78	839.81	917.59
8	64.81	852.78	917.59
9	51.85	865.74	917.59
10	38.89	878.70	917.59
11	25.93	891.66	917.59
12	12.96	904.63	917.59
Total	1011.11	9999.97	11011.08