The type of interest on your loan changes what you actually pay — sometimes by tens of thousands of shillings. Yet most borrowers never ask which type applies to their loan.
Flat Rate Interest Interest is calculated on the original loan amount and stays the same every month throughout the repayment period.
Example: KES 100,000 at 10% flat rate for 12 months.
- Monthly interest = KES 100,000 × 10% ÷ 12 = KES 833
- Total interest paid = KES 10,000
- This sounds reasonable — but you are paying interest on money you no longer owe by month 6.
Reducing Balance Interest Interest is calculated only on what you still owe. As the principal reduces, so does the interest charge each month.
Example: KES 100,000 at 10% reducing balance for 12 months.
- Month 1 interest: based on KES 100,000
- Month 6 interest: based on roughly KES 55,000
- Total interest paid: approximately KES 5,500
The real comparison A 10% flat rate is equivalent to roughly 18% reducing balance. Mobile lenders who charge "7.5% per month flat" are actually charging you the equivalent of over 160% per year on a reducing balance basis.
Use the calculator on this site to see exactly what any loan will cost you before you agree to it.