What is the advantage of calculating interest on daily reducing balance?
In the annual reducing balance method employed by some of the banks, interest is calculated on the balance outstanding at the commencement of the year. Thus even though you have paid your EMIs regularly you end up paying interest on a higher balance. In the case of the daily reducing balance the interest is calculated only on the outstanding loan amount, which reduces every month as you pay your EMI. This effectively amounts to lower rate of interest.
