diff --git a/pallets/loans/src/lib.rs b/pallets/loans/src/lib.rs
index 8b592b2eab..e79832ed7b 100644
--- a/pallets/loans/src/lib.rs
+++ b/pallets/loans/src/lib.rs
@@ -355,6 +355,12 @@ pub mod pallet {
 			loan_id: T::LoanId,
 			amount: PrincipalInput<T>,
 		},
+		/// Debt of a loan has been decreased
+		DebtDecreased {
+			pool_id: T::PoolId,
+			loan_id: T::LoanId,
+			amount: RepaidInput<T>,
+		},
 	}
 
 	#[pallet::error]
@@ -890,6 +896,34 @@ pub mod pallet {
 
 			Ok(())
 		}
+
+		/// Decrease debt for a loan. Similar to [`Pallet::repay()`] but
+		/// without transferring from the pool.
+		///
+		/// The origin must be the borrower of the loan.
+		/// The decrease debt action should fulfill the repay restrictions
+		/// configured at [`types::LoanRestrictions`]. The portfolio valuation
+		/// of the pool is updated to reflect the new present value of the loan.
+		#[pallet::weight(T::WeightInfo::increase_debt(T::MaxActiveLoansPerPool::get()))]
+		#[pallet::call_index(14)]
+		pub fn decrease_debt(
+			origin: OriginFor<T>,
+			pool_id: T::PoolId,
+			loan_id: T::LoanId,
+			amount: RepaidInput<T>,
+		) -> DispatchResult {
+			let who = ensure_signed(origin)?;
+
+			let (amount, _count) = Self::repay_action(&who, pool_id, loan_id, &amount, false)?;
+
+			Self::deposit_event(Event::<T>::DebtDecreased {
+				pool_id,
+				loan_id,
+				amount,
+			});
+
+			Ok(())
+		}
 	}
 
 	// Loan actions
diff --git a/pallets/loans/src/tests/borrow_loan.rs b/pallets/loans/src/tests/borrow_loan.rs
index 20f51c8ae3..c74281bb65 100644
--- a/pallets/loans/src/tests/borrow_loan.rs
+++ b/pallets/loans/src/tests/borrow_loan.rs
@@ -601,9 +601,22 @@ fn increase_debt_does_not_withdraw() {
 		let loan_id = util::create_loan(loan);
 
 		let amount = ExternalAmount::new(QUANTITY, PRICE_VALUE);
-		config_mocks(amount.balance().unwrap());
+		MockPrices::mock_get(|id, pool_id| {
+			assert_eq!(*pool_id, POOL_A);
+			match *id {
+				REGISTER_PRICE_ID => Ok((PRICE_VALUE, BLOCK_TIME_MS)),
+				_ => Err(PRICE_ID_NO_FOUND),
+			}
+		});
+		MockPrices::mock_register_id(|id, pool_id| {
+			assert_eq!(*pool_id, POOL_A);
+			match *id {
+				REGISTER_PRICE_ID => Ok(()),
+				_ => Err(PRICE_ID_NO_FOUND),
+			}
+		});
 
-		assert_ok!(Loans::borrow(
+		assert_ok!(Loans::increase_debt(
 			RuntimeOrigin::signed(BORROWER),
 			POOL_A,
 			loan_id,
diff --git a/pallets/loans/src/tests/repay_loan.rs b/pallets/loans/src/tests/repay_loan.rs
index 87d88ba7c2..7772b14849 100644
--- a/pallets/loans/src/tests/repay_loan.rs
+++ b/pallets/loans/src/tests/repay_loan.rs
@@ -978,3 +978,44 @@ fn with_external_pricing() {
 		assert_eq!(current_price(), NOTIONAL);
 	});
 }
+
+#[test]
+fn decrease_debt_does_not_deposit() {
+	new_test_ext().execute_with(|| {
+		MockPools::mock_deposit(|_, _, _| {
+			unreachable!("increase debt must not withdraw funds from the pool");
+		});
+
+		let loan = LoanInfo {
+			pricing: Pricing::External(ExternalPricing {
+				max_borrow_amount: ExtMaxBorrowAmount::NoLimit,
+				..util::base_external_pricing()
+			}),
+			..util::base_external_loan()
+		};
+
+		let loan_id = util::create_loan(loan);
+
+		let amount = ExternalAmount::new(QUANTITY, PRICE_VALUE);
+		util::borrow_loan(loan_id, PrincipalInput::External(amount.clone()));
+
+		MockPrices::mock_get(move |id, pool_id| {
+			assert_eq!(*pool_id, POOL_A);
+			match *id {
+				REGISTER_PRICE_ID => Ok((PRICE_VALUE, BLOCK_TIME_MS)),
+				_ => Err(PRICE_ID_NO_FOUND),
+			}
+		});
+
+		assert_ok!(Loans::decrease_debt(
+			RuntimeOrigin::signed(BORROWER),
+			POOL_A,
+			loan_id,
+			RepaidInput {
+				principal: PrincipalInput::External(amount),
+				interest: 0,
+				unscheduled: 0,
+			}
+		));
+	});
+}