Reducing-balance loans: repayments, total interest and the outstanding balance

What this note covers

1. How a reducing-balance loan actually works
2. Setting up the financial solver for a loan
3. Worked example: repayment and total interest
4. The outstanding balance after n repayments
5. Splitting one repayment into interest and principal
6. Rounding, reasonableness and the assumptions of the model
7. How this topic is examined in the SACE Stage 2 paper, and what separates a top answer

7 sections · 12 key terms & formulas · 6 common mistakes