Flat vs Reducing-Balance Comparison
The same '18%' can mean two very different loans. Enter a principal, rate and term to see flat-rate and reducing-balance interest side by side — and exactly how much more the flat method costs.
How this is calculated
Flat rate charges interest on the original principal for the whole term: interest = P × rate × years, split into equal payments.
Reducing balance uses the annuity formula on the shrinking balance — the identical method as the Loan Repayment Calculator, imported directly so the two pages can never disagree. The difference between the two totals is what the flat method costs extra.
What is flat-rate interest?
A flat rate looks cheaper because the number is smaller, but it charges interest on money you have already paid back. It is common in informal and some formal lending precisely because the headline figure understates the real cost.
What is reducing-balance interest?
Reducing balance is the fairer, more transparent method: you only pay interest on what you still owe. It is the method Ustawi’s Lending app uses, and the one regulators generally favour for clear cost disclosure.
How to tell which method a lender is using
Ask one question: “Is interest on the original amount, or on the balance I still owe?” Then ask for the effective annual rate. If a lender quotes a flat rate, run it through the EIR/APR calculator to see the true annual cost before you sign.
FAQ
What is flat-rate interest?
Interest charged on the original principal for the entire term, regardless of how much you have already repaid. Every month's interest is the same, so the total is simply principal × rate × years.
What is reducing-balance interest?
Interest charged only on the balance still outstanding. As you repay principal, the balance shrinks and so does the interest — so the same headline rate costs less than under the flat method.
Why does flat always cost more?
Because under flat you keep paying interest on money you have already repaid. For any positive rate over more than one month, flat interest is mathematically always higher than reducing-balance interest on the same loan.
How much more does flat rate cost in practice?
It depends on the rate and term, but over a 12-month loan a flat rate commonly costs roughly 70–90% more interest than reducing balance at the same headline percentage, and the gap widens with longer terms. Enter your own figures above to see the exact shilling difference.
How do I tell which method a lender is using?
Ask whether interest is calculated on the original amount or the outstanding balance, and ask for the effective annual rate (EIR). A flat quote and a reducing-balance quote at the same headline percentage are not the same deal — use the EIR/APR calculator to compare true cost.
Which method does Ustawi use?
Reducing balance. This comparison imports the exact reducing-balance engine used by the Loan Repayment calculator and Ustawi's Lending app, so the fair-method figures here always match what a real Ustawi loan would charge.
Is flat-rate lending illegal?
No — flat rates are widely used and legal, especially in informal and some formal lending. The issue is transparency: because the headline understates the true cost, borrowers should always convert a flat quote to its effective annual rate before comparing offers.
Is there ever no difference?
Only at 0% interest, where both methods repay just the principal. At any positive rate over a multi-month term, flat costs more.
Run reducing-balance lending with Ustawi.
This comparison uses the very same reducing-balance engine as Ustawi’s Lending app. From origination and disbursement to repayments, collections and reporting, financial institutions price and service loans transparently on one platform borrowers can trust.
