## How to Calculate Sacco/Microfinance Loan EMI on Reducing Balance

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## Introduction

## Prerequisites

- The principal of the Loan
- The loan interest per annum usually expressed in percentage(e.g. 18% p.a)
- The repayment period(usually expressed in months). However, in some Saccos or microfinance institutions, the loan repayment period may run on a weekly or a bi-weekly basis although this is not common

## Finding the EMI of a Loan in Reducing Balance

(INTEREST RATE PER REPAYMENT / (((INTEREST RATE PER REPAYMENT + 1) ^ NO OF REPAYMENTS) – 1))))

## Example of EMI Calculation using Reducing Balance Formula

Using the formula above, calculate the EMI of a loan using the information below:

- Principal –
**$100, 000/=** - Interest rate –
**18% per annum** - Number of repayments – 3
**months**

The first step is converting the annual interest to a monthly interest by dividing it by 12. So, 18% divided by 12 equals to 1.5% or 0.05.

Now, enter the values in the formula

**EMI** = (PRINCIPAL * (INTEREST RATE PER REPAYMENT +

(INTEREST RATE PER REPAYMENT / (((INTEREST RATE PER REPAYMENT + 1) ^ NO OF REPAYMENTS) – 1))))

**EMI** = (100,000 * (0.015+

(0.015 / (((0.015+ 1) ^ 3) – 1))))

**EMI = 34,338.30/=**

**3**months, the client should pay an Equated Monthly Installment of

**$34,338.30/=**per month

## Calculate Interest and Principal Repayment for the 1st Month

**$1,500/=**

**34,338.30 – 1,500 = 32,838.30/=**

## Calculate Interest and Principal Repayment for the 2nd Month

**$1,007.43/=**

**34,338.30 – 1,007.43 = 33, 330.87/=**

## Calculate Interest and Principal Repayment for the 3rd Month

**$507.46/=**

**$507.46/=**

**34,338.30 – 1,007.43 = 33, 330.87/=**

Working on the reducing balance formula manually or using a spreadsheet application is quite tiring especially if the schedule of the loan spans for more than 3 months or when working with hundreds of Sacco/Microfinance clients.

Therefore, if you want to be more productive in your bank, consider using an application like **Frantek Sacco Software.**

The software will keep track of all your clients and enable you to create loan accounts while it calculates the schedule in the backend within seconds even for loans with up to 100 repayments periods as shown below.

Download Franktek Sacco Software

## Conclusion

## 3 Comments

## FRANCIS

April 10, 2021 at 2:31 pmQuite an interesting article about financial calculations. I have learnt a lot in this informative piece. Keep us posted and we shall all be financial literates.

Thank you Francis

## Lawrence Maina

March 18, 2023 at 10:21 amHi,

Everything was making sense until you threw in 0.015 without explanation here it came from or how you achieved it.

Thanks

## Mwandambo

March 24, 2023 at 9:10 amI was looking for reducing balance formula like the whole day then I found you… Thank you