[Mifos-users] Declining Balance computation

[Mark Mirasol]

Hello Ed,

We tried to create a P6000 today with a term of 25 weeks and a 41.6%/year nominal rate.  This should give us a total interest of 6000 * .416/52 * 25 = P1200.

If the interest calculation method is flat, our total interest is P1200.

However, if the interest calculation method is declining balance, our total interest is not equal to P1200.  

Shouldn't the total interest be the same regardless of calculation method?

Please advise.

--

Mark Philippe L. Mirasol
IT Project Manager

TEAMMICRO

Mobile: +63 9173008873

Email: markm...@teammicro.net

[Sughosh Bharadwaj]

Hello Mark,

If the interest type is flat, it is always calculated on the disbursed principal.

In your case,no matter how much amount is repaid, your interest is always calculated on 6000

Whereas, in declining balance, interest is always calculated on the outstanding principal.

i.e interest keeps reducing down the installments,which is the correct behavior.

If you have repaid principal amount of 1000,then interest for the next installment will be calculated on

amount of 5000 and so on.

Regards,

Sughosh

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[Mark Mirasol]

Thank you, sughosh. So if we wish to earn 20% interest over 25 weeks for our loans, we have to compute the nominal interest rate.  The nominal interest rate for flat rate and declining balance is not the same. 

[Mark Mirasol]

Do you have a formula for computing the nominal interest rate for declining balance calculations?

[Sangamesh Nadagoudar]

Hello Mark,

Please find the link here:

https://mifosforge.jira.com/wiki/display/docs/Declining+Balance+Interest+Calculation

http://mifos.cloud.answerhub.com/questions/162/which-are-the-formulas-used-for-calculating-flat-i.html

Thanks,

Sangamesh

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[Mark Mirasol]

Dear Sangamesh,

These formulas assume that we already know what r is and this formula is for computing the EMI.

If I want to have a flat interest of 20% over a term of 25 weeks, how do i compute for r if I wish to get the same total interest using declining balance calculation.

Please advise.