A loan’s headline rate does not tell you what it costs. Two loans can both say “15%” and one can cost nearly twice as much as the other. The difference is how the interest is worked out.
Flat rate
Interest is charged on the whole amount you borrowed, for the whole time, even though you pay part of it back every month.
EXAMPLE DATA: borrow KES 100,000 for 12 months at 15% flat. Interest is 15% of 100,000 = KES 15,000. You repay KES 115,000, or KES 9,583.33 a month.
Reducing balance
Interest is charged only on what you still owe. As you repay, the interest gets smaller.
EXAMPLE DATA: the same KES 100,000 for 12 months at 15% on a reducing balance. The monthly payment is KES 9,025.83 and the total interest is KES 8,310.
| Same loan, same “15%” | Monthly payment | Total interest |
|---|---|---|
| Flat rate | KES 9,583.33 | KES 15,000 |
| Reducing balance | KES 9,025.83 | KES 8,310 |
A 15% flat rate costs about as much as a 26.6% reducing-balance rate. Banks’ published rates, like the Central Bank’s averages, are on a reducing-balance basis, so always convert before you compare.
Fees
Processing, appraisal, insurance and excise duty are added on top, and some are taken from the money before you receive it. Mobile loans are priced almost entirely in fees: see what a mobile loan really costs.
Three questions before you sign
- What is the total I will repay, in shillings? This one number includes everything.
- Is the rate flat or on a reducing balance?
- What happens if I pay late, or early?
Then put the offer through the fair-rate check, or try your own numbers in the loan calculator.
Information, not advice.