Master loan interest calculations. Understand flat rates, reducing balance, APR, and how banks determine your rate. Make informed borrowing decisions.
Interest is the cost of borrowing money - what you pay the lender for using their funds. In Kenya, interest rates vary widely from 6% (government loans) to over 100% APR (some mobile loans). Understanding how interest is calculated helps you compare loans accurately and avoid paying more than necessary.
13-18%
Per annum (yearly)
3-15%
Per month (30 days)
6-9%
Per annum (yearly)
Flat rate calculates interest on the original principal amount throughout the entire loan period, regardless of how much you've repaid. This method is simpler but results in higher total interest costs.
Interest = Principal × Rate × Time
The interest for the entire period is calculated upfront and divided equally across all monthly payments.
Loan Amount: KES 100,000
Interest Rate: 10% per annum (flat)
Loan Period: 2 years (24 months)
Total Interest: 100,000 × 10% × 2 = KES 20,000
Total Repayment: 100,000 + 20,000 = KES 120,000
Monthly Payment: 120,000 ÷ 24 = KES 5,000
Reducing balance calculates interest only on the outstanding principal. As you make payments and reduce the principal, the interest charged also decreases. This is the most common method used by Kenyan banks and is significantly cheaper than flat rate.
Interest each month = Outstanding Balance × (Annual Rate ÷ 12)
Each payment reduces the principal, so next month's interest is calculated on a smaller balance.
Loan Amount: KES 100,000
Interest Rate: 10% per annum (reducing balance)
Loan Period: 2 years (24 months)
Monthly Interest Rate: 10% ÷ 12 = 0.833%
Monthly Payment (EMI): KES 4,614
Total Repayment: 4,614 × 24 = KES 110,736
Total Interest: 110,736 - 100,000 = KES 10,736
Savings vs Flat Rate: KES 9,264 (46% less interest!)
| Month | Balance | Interest | Principal | Payment |
|---|---|---|---|---|
| 1 | 100,000 | 833 | 3,781 | 4,614 |
| 2 | 96,219 | 802 | 3,812 | 4,614 |
| 3 | 92,407 | 770 | 3,844 | 4,614 |
Notice how interest decreases each month as the balance reduces.
Some lenders advertise "10% interest" without specifying flat or reducing balance. A 10% flat rate loan costs almost DOUBLE a 10% reducing balance loan. Always clarify before signing.
APR represents the true cost of a loan, including both interest and all mandatory fees. It's the most accurate way to compare different loan offers.
Advertised: "Personal Loan at 14% p.a."
Loan Amount: KES 200,000
Nominal Interest: 14% per annum
Processing Fee: 2.5% = KES 5,000
Insurance: 1% annually = KES 2,000/year
Tenure: 2 years
Interest Cost: ~KES 30,000 (reducing balance)
Processing Fee: KES 5,000
Insurance (2 years): KES 4,000
Total Cost: KES 39,000
Effective APR: ~17.2% (not 14%!)
Mobile loans often advertise monthly rates which seem low but translate to very high annual rates:
Note: Simple multiplication (×12) gives rough APR. Actual APR with compounding is slightly higher.
Banks don't offer the same rate to everyone. Your personal rate depends on multiple factors that determine your creditworthiness and the bank's risk assessment.
The CBR is set by Central Bank of Kenya and influences all lending rates. As of October 2025, CBR is around 12.75%. Banks add their margin on top of this base rate.
Example: If CBR is 12.75%, a bank might offer loans at CBR + 3% = 15.75% to low-risk customers.
Your CRB score (200-900) is the single biggest factor affecting your rate:
Loan Amount: Larger loans (KES 1M+) may qualify for better rates due to economies of scale.
Tenure: Shorter tenures (1-2 years) sometimes get slightly better rates than long-term loans (5+ years).
Secured loans (with collateral) typically get 2-4% lower rates than unsecured loans:
Banks have flexibility on rates. If you have excellent credit, significant income, or competing offers, you can negotiate 1-2% reduction. Always ask for a better rate - the worst they can say is no!
The Central Bank Rate is Kenya's monetary policy tool that influences all interest rates in the economy. Understanding CBR helps you time your loan applications and predict rate changes.
CBR is the rate at which Central Bank lends to commercial banks. When CBR increases, banks' borrowing costs rise, so they increase lending rates. When CBR decreases, loan rates generally fall.
Current CBR (Oct 2025): ~12.75%
Typical bank loan rate: CBR + 1% to 5% = 13.75% to 17.75%
Premium customers: May get CBR + 1% = 13.75%
Higher risk borrowers: May pay CBR + 5% = 17.75% or more
CBR has been volatile due to inflation management. Current trend shows slight easing.
Secured loans typically get 2-4% lower rates. Consider:
Get quotes from 3-5 banks and use competing offers to negotiate. Don't accept the first offer - showing banks you're shopping around gives you leverage for better rates.
While monthly payments are higher, shorter tenures (1-2 years vs 5 years) may qualify for 0.5-1% rate reduction and save significant interest over time.
Borrowing KES 10,000 for emergency, multiple options available:
Option A: M-Shwari (7.5% for 30 days)
Interest: 10,000 × 7.5% = KES 750
Repay: KES 10,750
Option B: KCB M-Pesa (2.5% for 30 days + 5% facility fee)
Facility fee: 10,000 × 5% = KES 500
Interest: 10,000 × 2.5% = KES 250
Repay: KES 10,750 (same total, but includes one-time fee)
Option C: Bank overdraft (18% p.a. for 30 days)
Monthly interest: 18% ÷ 12 = 1.5%
Interest: 10,000 × 1.5% = KES 150
Repay: KES 10,150 (Cheapest!)
Lesson: Bank products beat mobile loans for cost, but require existing relationships.
Need KES 500,000 for business expansion, 3-year repayment:
Lender A: 12% Flat Rate
Total interest: 500,000 × 12% × 3 = KES 180,000
Total repayment: 500,000 + 180,000 = KES 680,000
Monthly payment: 680,000 ÷ 36 = KES 18,889
Effective APR: ~22%
Lender B: 15% Reducing Balance
Monthly payment (EMI): KES 17,340
Total repayment: 17,340 × 36 = KES 624,240
Total interest: 624,240 - 500,000 = KES 124,240
Effective APR: ~16.5%
Result: Lender B saves KES 55,760 despite higher advertised rate!
KES 1,000,000 personal loan over 5 years:
Poor credit costs KES 2,107 MORE per month (KES 126,420 over 5 years!)
Government loans: 6-9% p.a.
Personal: 13-18% p.a.
Mortgage: 8-13% p.a.
2.5-15% monthly
(30-180% APR)
Flat Rate Interest:
I = P × R × T
Monthly Interest (Reducing):
I = Balance × (Rate ÷ 12)
Rough APR from Monthly:
APR ≈ Monthly Rate × 12
Reducing balance is always better for borrowers. At the same nominal rate (e.g., 10%), reducing balance costs about 40-50% less in total interest than flat rate because interest is calculated on the declining balance.
Mobile loans have higher default rates, no collateral, instant processing, and small amounts that make them expensive to administer. The convenience and accessibility come at a cost. Rates of 5-15% monthly (60-180% APR) are common.
Only if you have a variable-rate loan tied to CBR or another benchmark. Most personal loans in Kenya are fixed-rate, meaning your rate stays constant. Always confirm whether your loan is fixed or variable before signing.
Improving from fair (650) to excellent (800+) credit can reduce your rate by 2-4%, saving thousands or even hundreds of thousands over a loan's lifetime. For a KES 1M loan over 5 years, this could save KES 100,000+.
For 2025, rates below 14% are excellent, 14-16% are good, 16-18% are average, and above 18% are expensive. Your rate depends on credit score, income, and bank relationship. Always compare at least 3 offers.
Always calculate the total APR including all fees. Sometimes a loan with 15% interest and 1% fees costs less than one with 13% interest and 4% fees. Focus on total cost, not just the advertised rate.
Use our tools to compare interest rates and find the best loan for you.