Mortgage loan and personal loan, on the other hand, are applied based on reducing balance interest rate as the bank only charges interest on your loan’s remaining balance.
This is a sample calculation for a loan based on reducing balance interest rate. If you look closely, interest paid on a monthly basis is reduced as the remaining debt level drops. This is because the interest charged on the principal loan amount gets lower each month as you continue to pay down your principal loan amount.
Despite being the preferred choice when it comes to a loan, this type of interest is not applied to all credit facilities in Malaysia, at least not for hire purchase loan.