Two loans with the same headline rate can cost very different amounts. Here is why.
When you compare loans, the interest rate alone does not tell you the full cost. How the interest is calculated matters just as much.
Reducing balance
Interest is charged each month on what you still owe. As you repay, the balance falls and so does the interest portion of each payment.
Flat rate
Interest is calculated on the original amount borrowed for the entire term, even though you are paying it down. A flat rate therefore costs considerably more than the same reducing-balance rate.
A worked example
Borrowing UGX 2,000,000 for 12 months at 15%:
- Reducing balance: total interest of about UGX 166,000.
- Flat rate: total interest of UGX 300,000.
A 15% flat rate over 12 months is roughly equivalent to a 27% reducing-balance rate.
Use the loan calculator on our Loans page to compare both methods for any amount.