How Reducing-Balance Interest Actually Works

Most South African loans — including the estimates on this site — use reducing-balance (or 'amortising') interest. That means interest is calculated each month on what you still owe, not on the original loan amount.

In practice, this means a larger portion of your early repayments goes toward interest, and a larger portion of your later repayments goes toward the capital amount, even though your monthly repayment stays the same throughout the term.

This is different from 'flat rate' interest, where the interest is calculated once on the full original amount and spread evenly — which usually works out more expensive over the life of the loan.

Understanding this helps explain why settling a loan early can save you real money: you're avoiding interest on a shrinking balance, not on the original amount.