The Declining Balance EMI (also known as the Reducing Balance method) is a widely used loan repayment model in retail banking and microfinance. It offers a borrower-friendly repayment approach where the EMI (Equated Monthly Installment) remains fixed, but the interest is calculated on the reducing principal balance.
As the loan progresses, the interest portion of the EMI reduces, while the principal repayment increases. This ensures borrowers pay less interest overall compared to flat interest models and enjoy a fairer repayment structure.
How It Works
The borrower pays a fixed EMI each month.
Interest is calculated monthly on the outstanding principal, not the original loan amount.
With each repayment, the principal balance reduces, leading to lower interest in subsequent EMIs.
Over time, the interest portion shrinks, and the principal portion grows.
This continues until the loan is completely paid off.
How to Set Up the Declining Balance EMI Repayment Model in Pecunia Admin Console
To configure this repayment model for a loan product:
Navigate to the Product Management section.
Create a new loan product or edit an existing one.
Enable Multi-Tenor for the loan product.
In the Repayment Model dropdown, select: Equated Monthly Installments.
Fill out the other required loan product fields.
Save the product.
Watch the video below as a guide for configuring this repayment model