Understanding Loan Interest Rates: Flat Rate vs. Reducing Balance

When you borrow money, you have to pay back the money you borrowed as well as interest. But not all interest in Ghana is calculated the same way.

Two of the most common methods are:

• Flat Rate

• Reducing Balance (also called Declining Balance)

Many borrowers don’t understand the difference — and this can cost you thousands of cedis over time.

In this guide, you’ll learn:

• What each method means

• How interest is calculated

• Which option saves you more money

• What to ask before taking any loan

What Is Flat Rate Interest?

A flat rate means the lender charges interest on the original loan amount for the entire loan period — even though you’re paying down the loan.

Example:

You borrow ₵10,000 for 12 months at a flat 24% annual interest.

Interest = 24% of ₵10,000 = ₵2,400
Total repayment = ₵10,000 + ₵2,400 = ₵12,400
Monthly installment = ₵1,033.33

Even as you pay back the loan monthly, the interest remains based on the full ₵10,000, not the decreasing balance.

What Is Reducing Balance Interest?

With the reducing balance method, interest is charged on the remaining loan balance, not the original amount.

This means your interest goes down each month as you repay.

Example:

Borrow ₵10,000 for 12 months at 24% per annum (reducing balance)

• Month 1: Interest on ₵10,000 = ₵200

• Month 2: After paying ₵1,000, new balance = ₵9,000 → interest = ₵180

• Month 3: Balance = ₵8,000 → interest = ₵160
  … and so on.

Total interest ends up being much lower than the flat rate.

Key Differences: Flat Rate vs. Reducing Balance

Real-Life Example Comparison

Let’s say you borrow ₵5,000 for 12 months at 24% annual interest:

Flat Rate:

• Annual interest: ₵1,200

• Total repayment: ₵6,200

• Monthly payment: ₵516.67

Reducing Balance:

• First month interest: ₵100

• Total interest (approx): ₵650

• Total repayment: ₵5,650

• Monthly payments reduce slightly over time

You save ₵550 in interest with reducing balance!

Which Lenders Use Which Method?

Flat Rate Is Common With:

• Susu groups

• Microfinance companies

• Mobile loan apps (like Fido, Quick Credit)

• Hire-purchase schemes

Reducing Balance Is Common With:

• Commercial banks (e.g., GCB, Stanbic, Ecobank)

• Credit unions (e.g., GNAT, SIC Life, CUA members)

• Salary-based loans for government workers

Why Flat Rates Are Misleading

Lenders often advertise flat rate interest because:

• It looks cheaper (e.g., “24% flat rate”)

• Borrowers may not ask questions

• It’s simpler to explain

But in reality, a 24% flat rate is equivalent to around 42–45% reducing balance.

How to Compare:

Use this trick:
Flat rate × 1.8 = true interest (reducing balance)
So, 24% flat = ~43.2% reducing balance

Always ask the lender for the APR (Annual Percentage Rate) or effective interest rate.

Tips to Choose the Right Option

Choose Flat Rate if:

• You’re borrowing a small amount (₵1,000 – ₵3,000)

• Loan term is short (under 6 months)

• You’re using a susu, mobile loan, or microfinance lender

• You understand the full cost and are okay with it

Choose Reducing Balance if:

• You’re borrowing large amounts (₵5,000 or more)

• Loan term is long (6–24 months)

• You want to save on interest

• You’re dealing with banks or credit unions

What to Avoid

• Lenders who don’t explain the interest method

• No written loan agreement or unclear repayment schedule

• Monthly payments that seem too high — always do the math

• Loan agents who advertise “cheap loans” with hidden flat rate traps

Ask Before You Sign

Before taking any loan in Ghana, ask these questions:

1. What is the total repayment amount?

2. Is the interest flat rate or reducing balance?

3. Can I see a breakdown of monthly payments?

4. What is the effective interest rate (APR)?

5. Are there any hidden charges?

Remember: Cheap doesn’t always mean better. Transparent does.

Understanding how your interest is calculated helps you save money, avoid stress, and borrow responsibly.

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