Reducing balance (the honest one)
This is how the Central Bank of Kenya publishes bank rates, and how all loans on realtimerates are calculated. Interest is charged each month on the remaining principal. As you pay the loan down, the interest portion of each installment shrinks and the principal portion grows.
A KES 1,000,000 loan at 15% reducing over 5 years has a monthly payment of about KES 23,800 and costs ~KES 428,000 in total interest.
Flat rate (the tricky one)
A flat rate charges interest on the original principal for every month of the loan, even after you've paid most of it down. A 15% flat rate on the same KES 1,000,000 over 5 years charges 15% × 1,000,000 × 5 = KES 750,000 in interest — almost double.
To compare apples to apples, a 15% flat rate is roughly equivalent to a 26-28% reducing-balance rate. Some mobile-lending and logbook products advertise 'just 5% per month' — that's a flat rate, and it works out to ~108% reducing p.a.
How to spot it
- If a lender quotes interest 'per month' on a multi-year loan, ask whether it's flat.
- If they give you a total repayment amount that is simply
principal × (1 + rate × years), it's flat. - Regulated Kenyan banks are generally reducing-balance by default. Digital and shylock-style lenders often aren't.