Reducing-balance interest: how most business loans really cost

How reducing-balance works

Reducing-balance interest is charged only on the amount you still owe. Each repayment shrinks the balance, so each month's interest is a little smaller than the last. Early in the term most of your payment is interest; later, most of it clears principal. This is standard amortisation and how the majority of business loans work.

Why it beats a flat rate

A flat rate keeps charging on the original balance even after you have paid most of it off. Reducing-balance does not, so for the same headline number it costs far less. See flat rate vs APR for the size of the gap.

Early repayment saves money

Because interest tracks the outstanding balance, overpaying or settling early cuts the interest you would otherwise have paid on that amount. On a reducing-balance loan without heavy early-settlement charges, clearing debt early is almost always worthwhile.

Reading the amortisation

An amortisation schedule shows how each payment splits between interest and principal over the term. It reveals exactly how much of your money clears the debt versus paying for the borrowing — useful when deciding whether to overpay.

See the schedule

Use the calculator to view repayments and how the interest falls over the term.

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