What a loan really costs
A loan is money you use now and pay back later, plus interest — the fee for borrowing. Most bank and microfinance loans use reducing-balance interest: you pay interest only on what you still owe, so it shrinks as you repay.
The payment, in plain terms
Borrow 1000 for 12 months at 15% a year. You pay about 90 each month. Of the total, roughly 83 is interest over the year. The trick: a longer term means smaller monthly payments but more total interest.
Before you borrow
Ask: will the money I borrow earn more than the interest costs? If a 1000 loan lets you earn 300 extra but costs 83 in interest, borrow. If it only earns 50, don't.
A market trader in Kisumu was offered two loans with the same monthly payment. She compared total repayment instead: one cost 2,300 over 18 months, the other 3,100 over 30. She took the shorter loan, cleared it, and used the 800 difference as stock capital the following year.
A boda rider took a 36-month loan because the payment looked easy, then realised he would pay nearly triple the bike's price. He renegotiated to 20 months after six payments, cutting the remaining interest — a recovery that worked only because his lender allowed early restructuring without penalty, which he checked before signing anything new.
Practice
A longer loan term gives smaller monthly payments. What is the downside?
You pay more total interest over the life of the loan.
Reducing-balance interest is charged on what?
Only on the balance you still owe, which falls as you repay.
Open the Loan Calculator. Enter 1000 at 15% and compare a 12-month term with a 36-month term. What happens to total interest?
The longer term lowers the monthly payment but the total interest paid rises sharply — you pay more overall to borrow the same amount.
Write down one thing you'd borrow for, the monthly payment you could afford, and the extra income it would bring.
If the extra income comfortably beats the payment plus interest, the loan makes sense. If it's close or short, don't borrow yet.
