16/03/2026
Know the differences between reducing balance, flat rate, and amortized interest rates/amortization when taking a loan.
1. Reducing Balance Interest
Interest is charged on the remaining loan balance.
As you repay the loan, the outstanding balance decreases, so the interest charged also reduces over time.
Example:
If you borrow KSh 100,000 at 10% interest, the first interest is calculated on KSh 100,000. After you repay part of the loan, the next interest is calculated on the remaining balance, which is lower.
2. Flat Rate Interest
Interest is calculated on the full loan amount for the entire loan period, regardless of how much of the loan you have repaid.
Your monthly payment stays the same, and the interest does not decrease as the balance reduces.
Example:
If you borrow KSh 100,000 at a 10% flat rate, the interest is always calculated on KSh 100,000, even after you start repaying the loan.
3. Amortized Interest/Amortization
With an amortized loan, you make equal monthly payments throughout the loan period.
The interest is calculated on a reducing balance, but it is spread over the entire loan period, allowing you to pay a fixed amount every month. This means you know exactly how much you will pay each month.
Early payments cover more interest, while later payments cover more of the principal.
Example:
If you borrow KSh 100,000, your monthly payment stays the same. At first, more of the payment goes to interest, and later more goes toward repaying the loan amount.
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