How loan interest is calculated
The same interest percentage can mean quite different amounts of money depending on how it is applied. South African credit uses two methods, and confusing them is the most common reason borrowers misjudge what a loan costs.
On the original amount: interest is calculated on what you borrowed, for each period of the term. R5 000 at 5% a month for three months is R250 three times over — R750. Repaying capital during the term does not reduce the interest already built into the total.
On a reducing balance: interest is charged each period on what is still outstanding. Early instalments are mostly interest and later ones mostly capital, which is why settling a long loan halfway through does not halve the interest you have paid.
Because the mechanics differ, comparing a monthly short-term rate against an annual personal loan rate tells you almost nothing. Annualising 5% a month produces a dramatic-looking number that overstates what you pay on a loan cleared in weeks; comparing 5% a month against 20% a year understates it.
The only comparison that works across both is the total cost of credit in rand — the figure every South African pre-agreement quote must show. Two quotes with wildly different-looking rates become directly comparable on that line.
Related
Sources and last checked
- National Credit Act 34 of 2005 and its regulations — Government, as at 10 August 2026.
Page last checked 10 August 2026. Statutory caps and lender terms change — confirm anything you intend to rely on with the provider or the National Credit Regulator. Found something wrong? Tell us and we will correct it.