Flat Rate vs Reducing Balance: How Loan Interest Works in Tanzania
Two loans can both be advertised at 12% and cost you wildly different amounts. The difference is whether the lender charges that 12% on what you still owe, or on the full amount you borrowed for the whole term. This guide explains both methods, shows what the gap costs in shillings, and lists what to ask before you sign.
Reviewed by the Calculator editorial team · Last updated 10 September 2026
The short answer
A flat rate is charged on the original loan amount for the entire term, even after you have repaid most of it. A reducing-balance rate is charged only on what you still owe, so it falls as you repay.
The practical consequence: at the same quoted rate, a flat-rate loan costs roughly 1.8 times as much interest as a reducing-balance loan, and its true annual cost is about 1.7 to 1.8 times the number the lender quotes. A loan advertised at 12% flat is really costing you around 21% a year.
This is not a trick or a scam. Both methods are legal, both are common in Tanzania, and both are used by entirely reputable lenders. But they are not comparable, and a lender quoting the flat figure is quoting the smaller-looking number.
What a flat-rate loan actually charges
Flat-rate interest is simple interest on the original principal, charged for every year of the term regardless of how much you have already repaid.
The formula is interest = principal × rate × years. On 10,000,000 TZS at 12% over three years that is 10,000,000 × 0.12 × 3 = 3,600,000 TZS of interest.
The instalment is then simply the total divided by the number of months: (10,000,000 + 3,600,000) ÷ 36 = 377,778 TZS a month. Of that, 277,778 TZS repays principal and 100,000 TZS is interest — and those two parts stay fixed for the whole term.
Look at the final month. You owe only 277,778 TZS, but you still pay 100,000 TZS of interest on it — an effective rate of about 36% for that month. That is the whole source of the difference, and it is why flat rates look cheap and behave expensively.
What a reducing-balance loan charges
Reducing balance — also called amortising — charges interest on the outstanding balance each month. As the balance falls, the interest falls with it.
The instalment comes from the standard amortising formula, which is solved so the loan is exactly repaid by the end of the term: M = P × r ÷ (1 − (1 + r)^−n), where r is the monthly interest rate and n the number of months.
On the same 10,000,000 TZS at 12% over three years, the instalment is 332,143 TZS and the total interest is 1,957,152 TZS. That is 1,642,848 TZS less interest than the flat-rate version of the same loan.
The shape is the mirror image of a flat loan. In the first month almost the whole instalment is interest and only a little repays principal; by the last month it is almost entirely principal. That is exactly why the total interest is lower.
The same rate, two very different bills
The gap widens with the term, because a flat rate keeps charging interest on principal you repaid long ago.
| Term | Flat instalment | Flat interest | Reducing instalment | Reducing interest | True annual cost |
|---|---|---|---|---|---|
| 1 year | 933,333 | 1,200,000 | 888,488 | 661,855 | 21.5% |
| 2 years | 516,667 | 2,400,000 | 470,735 | 1,297,633 | 21.6% |
| 3 years | 377,778 | 3,600,000 | 332,143 | 1,957,152 | 21.2% |
| 4 years | 308,333 | 4,800,000 | 263,338 | 2,640,241 | 20.8% |
| 5 years | 266,667 | 6,000,000 | 222,444 | 3,346,669 | 20.3% |
What the true annual cost looks like
The number that makes the two methods comparable is the effective annual rate — the reducing-balance rate that would produce the same instalment you are actually being asked to pay.
Working it out means solving for the rate that makes the amortising formula return the flat-rate instalment. You do not have to do that by hand — ask the lender for the effective rate, or the total cost of credit, in writing.
Note the shape of the numbers. A flat rate runs at roughly 1.7 to 1.8 times its quoted figure in true annual terms, and the multiple is largest on short terms: 18% flat over three years is about 30.6% a year, and even 10% flat is nearly 18%.
| Quoted flat rate | Flat interest | Reducing interest | True annual cost |
|---|---|---|---|
| 10% | 3,000,000 | 1,616,187 | 17.9% |
| 12% | 3,600,000 | 1,957,152 | 21.2% |
| 15% | 4,500,000 | 2,479,518 | 26.0% |
| 18% | 5,400,000 | 3,014,862 | 30.6% |
What "total cost of credit" includes
Interest is rarely the only charge. The number that matters is everything you repay, not just the rate.
Ask for the total cost of credit — the full amount you will repay including every fee — and compare that figure rather than the headline rate. If a lender will not put it in writing, that reluctance is itself useful information.
- An arrangement or processing fee, usually a percentage of the loan.
- Insurance, which some lenders make a condition of the loan.
- Valuation or appraisal fees, where the loan is secured against property.
- Compulsory savings, or a deposit held against the loan and released later.
- Late-payment charges, and the additional interest they attract.
Questions to ask before you sign
Five questions separate a fair loan from an expensive one.
- Is this a flat rate or a reducing balance?
- What is the effective annual rate, or the total cost of credit?
- What fees sit on top of interest, and are any of them compulsory?
- What happens if I repay early — is there a penalty, and do I save the interest I have not yet accrued?
- What is the total I will repay over the whole term, in shillings?
Common mistakes
Most of the cost of an expensive loan is agreed before the borrower realises there was a choice.
- Comparing a flat quote against a reducing-balance quote, and assuming the lower rate means the cheaper loan.
- Reading the quoted rate as the interest rate. On a flat loan, it is not.
- Stretching the term purely to lower the monthly instalment — a flat-rate structure keeps charging on the full principal for longer.
- Ignoring fees, which can add more to your cost than the difference between two rates.
- Not asking about early repayment, then discovering the flat loan charged its interest up front.
Worked example
On a 10,000,000 TZS loan quoted at 12% over 3 years, a flat-rate lender charges 3,600,000 TZS in interest (377,778 TZS a month), while the same 12% on a reducing balance costs 1,957,152 TZS (332,143 TZS a month) — so the flat loan's true annual cost is about 21.2%, not 12%.
How to check a quote yourself
You can reproduce the comparison above without trusting anyone's summary, including ours.
For a flat-rate quote, multiply the principal by the rate by the number of years to get the total interest, add the principal, and divide by the months. For the reducing-balance comparison, enter the same figures into the loan calculator below.
If the two totals differ by a wide margin, you have measured the flat-rate premium on your own loan rather than taking it on faith.
Loan Calculator
Try it with your own numbers:
Related guides
Frequently asked questions
What is the difference between a flat rate and a reducing balance?
A flat rate charges interest on the full original loan for the whole term. A reducing balance charges interest only on what you still owe, so the interest falls as you repay.
Which is cheaper, flat rate or reducing balance?
At the same quoted rate, reducing balance is always cheaper — typically around 1.8 times less interest. A 12% flat loan costs roughly what a 21% reducing-balance loan costs.
Why is my loan more expensive than the advertised rate?
If the loan is quoted flat, the advertised rate is applied to the original principal for the whole term rather than to the falling balance. Fees added on top can increase the cost further.
Is a flat rate illegal in Tanzania?
No. Flat-rate pricing is legal and widely used. The issue is comparability: a flat rate and a reducing-balance rate at the same number are not the same loan, so they should not be compared directly.
How do I work out the effective interest rate on a loan?
Ask the lender for the effective annual rate or the total cost of credit in writing. Alternatively, compare the total amount repayable on the flat quote against a reducing-balance calculation on the same principal and term.
Does repaying early save me money on a flat-rate loan?
Usually far less than on a reducing-balance loan, because flat-rate interest is calculated on the full principal for the whole term. Always ask about early-repayment terms and penalties before signing.