Definition:
The adjusted balance method is a technique used to calculate interest on a loan or debt when there are periodic payments. It involves calculating interest on the outstanding balance of the loan after each payment is made.
Key points about the adjusted balance method:
- Interest calculation: Interest is calculated based on the remaining balance of the loan after each payment.
- Periodic payments: The adjusted balance method is often used for loans with periodic payments, such as mortgages or car loans.
- Accuracy: It provides a more accurate calculation of interest compared to the simple interest method, especially for loans with longer terms.
Example:
If a loan has a starting balance of $100,000, an interest rate of 5%, and monthly payments of $1,000, the adjusted balance method would calculate interest on the remaining balance after each payment. For example, after the first payment, the outstanding balance would be $99,500, and the interest for the following month would be calculated on that amount.
The adjusted balance method is commonly used in the financial industry to calculate interest on loans and debts.
