A loan of Rs. 2,40,000 at 9% per annum compounded monthly is repaid by the reducing balance method in equal monthly instalments of Rs. 7,632, each paid at the end of a month. The interest part of the second instalment is
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs. 1,756.26
In the reducing balance method, the interest in each EMI is charged on the principal still outstanding. The rate per month is
\( \displaystyle i = \frac{0.09}{12} = 0.0075 \)
Interest in the first EMI:
\( 240000 \times 0.0075 = 1800 \)
Principal repaid by the first EMI:
\( 7632 - 1800 = 5832 \)
Principal outstanding after the first EMI:
\( 240000 - 5832 = 234168 \)
Interest in the second EMI:
\( 234168 \times 0.0075 = 1756.26 \)
Why the other options are incorrect
Option (1) Rs. 1,800 — Incorrect. This is the interest part of the first EMI; the second is smaller because part of the loan has been repaid.
Option (2) Rs. 5,875.74 — Incorrect. This is the principal part of the second EMI (7,632 − 1,756.26), not its interest part.
Option (4) Rs. 21,075.12 — Incorrect. This charges the yearly rate 9% on the balance; the monthly rate 0.75% must be used.