Interest follows the outstanding balance
In a reducing-balance loan, interest is charged on what you still owe. Early in an amortising loan, the balance is larger and interest takes a bigger share of the instalment. As principal falls, more of the same instalment repays capital.
A longer term can reduce the monthly payment while increasing total interest. A lower instalment alone does not establish a cheaper loan.
Fees belong in the comparison
A financed initiation fee increases the principal on which interest is charged. Monthly service fees and insurance add to cash payments. Enter the disclosed amounts from the quote; a calculator cannot infer the terms offered to you.
A nominal annual rate of 12% divided into monthly periods produces 1% interest a month. Its effective annual rate is approximately 12.68% before fees. The effective interest-only rate is not an all-in annual cost measure.
What an extra payment can change
Additional payments can shorten a loan and reduce interest when the lender applies them to the balance. For a zero-interest R12 000 loan, paying R1 200 instead of R1 000 clears the balance in 10 rather than 12 months.
Ask for a settlement quote before closing an account. Daily interest, insurance adjustments and contractual charges can cause the lender’s final settlement to differ from a monthly planning schedule.
A zero-interest check can reveal the cost of time
Consider an invented R12 000 loan at zero interest with no initiation charge. The principal portion is R1 000 a month over twelve months or R500 over twenty-four. If an illustrative R50 monthly fee applies, the fee totals are R600 and R1 200 respectively. A lower instalment can therefore accompany a higher total cost even in this simplified example.
The R50 is an example input, not a statutory fee or a lender's current tariff. Enter the charges from the actual quote, including the stated treatment of insurance and financed fees. Then add the quoted interest rate and compare the complete results.
Check the repayment pattern before sharing a result
Look for the amount financed, interest, recurring charges, total repayment and final payment. Extra payments may shorten the modelled term; they do not necessarily lower every scheduled instalment. A final payment can also differ because the remaining balance is smaller than the normal payment.
Download a report with the inputs and assumptions if you need to discuss the figures. Keep a lender's quote alongside it. The report is a mathematical scenario, not an offer of credit or a confirmation that the lender will use the same daily accrual and settlement method.
Educational information, not personalised financial advice. This guide was prepared for this release. Read our editorial and corrections policy.