When comparing loans, most people look first at the interest rate. But the rate alone doesn’t tell you the full cost. How interest is calculated, what fees apply and how long you repay all change the final figure.
Flat rate vs reducing balance
- Flat rate: interest is charged on the original loan amount for the whole term, even as you repay.
- Reducing balance: interest is charged only on what you still owe, so it falls as you repay.
Here’s the difference on a ₦1,000,000 loan repaid monthly over 12 months at 3% per month:
| Method | Monthly repayment (₦) | Total interest (₦) | Total repaid (₦) |
|---|---|---|---|
| Flat rate | 113,333 | 360,000 | 1,360,000 |
| Reducing balance | 100,462 | 205,544 | 1,205,544 |
Same headline rate, but the flat-rate loan costs about ₦154,000 more. Neither method is wrong; you just need to compare like with like.
Five questions to ask any lender
- Is the rate flat or on a reducing balance, and is it monthly or yearly?
- What upfront fees apply, such as application, management or processing fees?
- What is the total amount I will repay over the full term?
- Are there charges for repaying early, or penalties for late payment?
- What collateral or guarantees are required?
Compare on total cost
The single most useful number is the total amount you’ll repay, including all fees. Ask every lender for it in writing, then compare offers side by side. A reputable lender will give you this clearly before you sign.
Want a clear breakdown before you borrow? Try our loan calculator or speak to our team for a full cost breakdown on any Peach Financial product.
This article is general information, not financial advice. Always review the terms of any loan before signing.
