What a loan really costs in Tanzania

The number that matters is the total, not the rate

Lenders in Tanzania usually quote a monthly interest rate: 10% a month, 15% a month, sometimes more. A rate on its own tells you very little, because two lenders quoting the same rate can ask for very different amounts of money back, depending on how long the loan runs, how the interest is calculated, and what else they charge.

Before you agree to anything, ask one question and write the answer down: how many shillings in total will I hand over before this loan is finished? Then ask the second: how many shillings will actually reach my hand on the day it is disbursed? The gap between those two numbers is the real price of the loan. A lender who cannot answer both plainly is a lender to think twice about.

You are allowed to ask for it in writing. A schedule showing each installment, its date and the balance left afterwards costs the lender nothing to print, and every serious institution has one. If the answer is "we will work it out later", that is information about the lender, not about the paperwork.

A worked example, in shillings

Say you borrow TZS 1,000,000 for six months at 15% a month, and the lender charges the interest on the full amount for the whole term — what is usually called flat interest. The interest is 1,000,000 × 15% × 6 = TZS 900,000. You repay 1,900,000 in total, which is 316,667 a month for six months. You borrowed one million and handed back almost two.

That is not a trick and it is not unusual. It is what 15% a month means when it is charged flat. The point of writing it out is that "fifteen percent" sounds small and "nine hundred thousand shillings" does not, and they are the same sentence.

Flat and reducing balance are not the same loan

There is a second way to charge the same rate. On a reducing balance, interest is worked out each month on what you still owe, not on what you originally borrowed. As you pay the principal down, the interest falls with it.

Take the same loan: TZS 1,000,000, six months, 15% a month — but on a reducing balance, with six equal payments. Each payment is about TZS 264,237, and the total you hand back is about TZS 1,585,421. The rate is identical. The difference is TZS 314,579, which is roughly a third of the money you borrowed in the first place.

So "what is your interest rate?" is only half a question. The whole question is: is that rate charged on the full amount for the whole term, or on the balance as it falls? Ask it in those words. Most loan officers answer it straight away, and the ones who do not have told you something.

The charges that are not called interest

The quoted rate is rarely the whole price. Depending on the institution, you may also meet an arrangement or processing fee, a compulsory savings or security deposit, an insurance premium, a valuation fee if you are pledging property, a registration fee for a chattels registry entry, and a penalty for paying late — or sometimes for paying early.

Fees matter most when they are taken out of the money before it reaches you. A 2% arrangement fee on TZS 1,000,000 is TZS 20,000; if it is deducted at disbursement you receive 980,000 and repay interest calculated on the full million. That is a real increase in the cost of the loan even though nobody changed the rate.

Compulsory savings work the same way and are common in group lending: you may be asked to keep 10% of the loan on deposit until the loan is finished. That money is yours and you get it back, but you are paying interest on a sum you were never able to use. Ask whether it earns anything while it sits there.

Short loans are where the rate hides the most

A daily or weekly loan can look cheap because each payment is small. Work it out in total instead. A common market loan of TZS 50,000 repaid at 2,000 a day for 30 days returns 60,000 — TZS 10,000 of cost on 50,000 borrowed, in one month, which is 20% for thirty days.

That can still be the right loan. If the 50,000 buys stock you sell within the month at a margin above 10,000, the loan paid for itself. If it pays for something that does not come back — a bill, a repair, a funeral — then the price is being paid out of next month's income, and next month has its own bills.

How to compare two offers in five minutes

Put both offers on one sheet of paper with four lines each: what reaches my hand, what I pay in total, how many payments and how big each one is, and what happens if I am late. Nothing else. Rates, brochures and promises go at the bottom where they belong.

The offer with the smaller total is not automatically the better one — a longer loan usually costs more in total but less each month, and an installment you can actually pay is worth something. What you are looking for is the offer whose true cost you understand and whose payment fits the money you really earn, not the money you hope to earn.

You can do the arithmetic on this site before you speak to anybody: the loan calculator asks for the amount, the rate and the term, and shows every installment and the total. It quotes nobody and commits you to nothing.

Write these down before you sign

The amount that reaches you. The total you will repay. The number of installments, the amount of each and the date each one falls due. Every fee, by name, and whether it is deducted or added. The late penalty and how it is calculated. What you have pledged as security, and what the lender may do with it.

If those six things are on paper and you still want the loan, you are making a decision rather than a guess. That is the whole purpose of this page.

You should not have to work these out alone. A licensed Tier 2 lender must state the effective annual interest rate including all fees, and the total of all payments, in the agreement itself (Regulation 39). If the agreement's figures and yours disagree, ask why before you sign.

Sources

• Microfinance (Non-Deposit Taking Microfinance Service Providers) Regulations, 2019 — Government Notice No. 679, Bank of Tanzania