When you're comparing loan offers, the interest rate is the first number you look at — but not all interest rates work the same way. The two most common methods are the flat rate and the reducing balance method, and understanding the difference can save you thousands of rands.
How flat rate interest works: With a flat rate loan, interest is calculated on the original loan amount throughout the entire loan term. If you borrow R10,000 at 5% flat per month for 3 months, you pay 5% × R10,000 = R500 per month in interest, regardless of how much you've already repaid.
How reducing balance works: With a reducing balance loan, interest is calculated on the outstanding balance each period. As you repay principal, the outstanding balance decreases — and so does the interest charged each month. This means your early instalments are mostly interest, while later payments are mostly principal.
A practical example: Borrow R10,000 at 3% per month reducing balance over 6 months. Your monthly instalment stays fixed, but the interest portion decreases each month as your balance reduces. Total cost is significantly lower than paying 3% flat on the original R10,000 each month.
Which is better? For the borrower, reducing balance is almost always cheaper in total interest paid. However, flat rate loans have simpler calculations and are common for short-term micro loans where the simplicity is valued by both lender and borrower.
The NCR requires lenders to disclose the effective annual interest rate (APR) so you can make meaningful comparisons. Always ask for the total cost of credit — including all fees and interest — before signing any agreement.
At Ndzinga Capital, our 30-Day Micro Loans use a flat rate structure for simplicity, while our Personal Loans use the reducing balance method. We always disclose the full cost of credit upfront, as required by the National Credit Act.
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