> ## Documentation Index
> Fetch the complete documentation index at: https://help.agatabo.com/llms.txt
> Use this file to discover all available pages before exploring further.

# Loan Rules Explained

> Comprehensive guide to interest calculation types, installment structures, and payment allocation with detailed examples

## Overview

Loan rules determine how interest is calculated, how payments are structured, and how repayments are allocated. Understanding these options is critical to creating the right type of loan for your members.

This guide provides detailed explanations with real numbers and tables showing exactly how each option works.

<Note>
  **Before creating a loan**, review this guide to understand which combination of settings creates the loan structure you want. Loan rules cannot be changed after the loan is created.
</Note>

## Interest Rate Type

The interest rate type determines how the stated rate is interpreted.

### MONTHLY Rate

The rate applies each month.

**Example**: 5% monthly interest

* Each month, 5% interest is charged on the loan
* Annual equivalent: 5% × 12 = 60% (if simple) or higher (if compounded)

**Use when**: Your organization thinks in monthly terms, common in tontines

### YEARLY Rate

The annual rate is divided across installments.

**Example**: 12% yearly interest on a 12-month loan

* Each month: 12% ÷ 12 = 1% interest
* Annual rate: 12%

**Use when**: You want to state annual percentage rate (APR) like banks do

<Warning>
  **Don't confuse these!** A 5% monthly rate is NOT the same as a 60% yearly rate:

  * 5% monthly SIMPLE interest = 60% total over 12 months
  * 5% monthly COMPOUND interest = 79.6% effective annual rate
  * 60% yearly rate ÷ 12 = 5% per month (same as 5% monthly SIMPLE)
</Warning>

## Interest Calculation Type

This determines **how** interest is computed on the loan.

### SIMPLE Interest

Interest is calculated only on the original principal, never on accumulated interest.

**Formula**: `Total Interest = Principal × Rate × Term`

#### Example: 100,000 RWF at 5% monthly SIMPLE for 12 months

**Calculation**:

* Principal: 100,000 RWF
* Rate: 0.05 (5% per month)
* Term: 12 months
* **Total Interest** = 100,000 × 0.05 × 12 = **60,000 RWF**
* **Total Repayment** = 100,000 + 60,000 = **160,000 RWF**

**Interest each month**: 60,000 ÷ 12 = 5,000 RWF (constant)

**When to use**:

* Short-term loans (under 6 months)
* Small amounts
* Members need simple understanding
* You want predictable total interest

***

### COMPOUND Interest

Interest is calculated on principal PLUS accumulated interest (interest compounds).

<Note>
  **Important**: For monthly installments, COMPOUND behaves the same as REDUCING\_BALANCE in Agatabo. The interest is calculated on the outstanding balance after each payment, just like REDUCING\_BALANCE.
</Note>

**Formula**: `Monthly Interest = Outstanding Principal × Rate`

#### Example: 120,000 RWF at 5% monthly COMPOUND for 12 months (with monthly payments)

With monthly payments, this produces the same result as REDUCING\_BALANCE:

* Monthly payment: \~13,361 RWF
* Total interest: \~43,168 RWF
* Same repayment schedule as REDUCING\_BALANCE example above

**When to use**:

* Functionally equivalent to REDUCING\_BALANCE for monthly installments
* Use REDUCING\_BALANCE instead for clarity

***

### REDUCING\_BALANCE Interest (Most Common)

Interest is calculated on the **outstanding principal** after each payment. As principal is repaid, interest decreases.

**Formula**: `Monthly Interest = Outstanding Principal × Rate`

#### Example: 120,000 RWF at 5% monthly REDUCING\_BALANCE for 12 months (EQUAL\_TOTAL payments)

**Installment calculation** (amortization):

* Monthly payment (PMT) = 13,361 RWF (calculated using amortization formula)

**Repayment schedule**:

| Month     | Balance Start | Payment     | Interest (5%) | Principal   | Balance End |
| --------- | ------------- | ----------- | ------------- | ----------- | ----------- |
| 1         | 120,000       | 13,361      | 6,000         | 7,361       | 112,639     |
| 2         | 112,639       | 13,361      | 5,632         | 7,729       | 104,910     |
| 3         | 104,910       | 13,361      | 5,246         | 8,115       | 96,795      |
| 4         | 96,795        | 13,361      | 4,840         | 8,521       | 88,274      |
| 5         | 88,274        | 13,361      | 4,414         | 8,947       | 79,327      |
| 6         | 79,327        | 13,361      | 3,966         | 9,395       | 69,932      |
| 7         | 69,932        | 13,361      | 3,497         | 9,864       | 60,068      |
| 8         | 60,068        | 13,361      | 3,003         | 10,358      | 49,710      |
| 9         | 49,710        | 13,361      | 2,486         | 10,875      | 38,835      |
| 10        | 38,835        | 13,361      | 1,942         | 11,419      | 27,416      |
| 11        | 27,416        | 13,361      | 1,371         | 11,990      | 15,426      |
| 12        | 15,426        | 13,361      | 771           | 12,590      | 0           |
| **Total** | -             | **160,332** | **43,168**    | **117,164** | -           |

**Key observations**:

* Payment stays constant at 13,361 RWF
* Interest decreases each month (from 6,000 to 771)
* Principal increases each month (from 7,361 to 12,590)
* Total interest: 43,168 RWF (much less than COMPOUND's 79,586 RWF)

**When to use**:

* **Most commercial loans** use this method
* Fair calculation that rewards early repayment
* Predictable monthly payment
* Lower total interest than COMPOUND
* Industry standard

<Note>
  **Recommended**: Use REDUCING\_BALANCE for standard loans. It's fair to both borrower and lender, and members recognize it from commercial banks.
</Note>

***

## Interest Calculation Comparison

Same loan (100,000 RWF at 5% monthly for 12 months):

| Calculation Type      | Total Interest | Total Repayment | Notes                                          |
| --------------------- | -------------- | --------------- | ---------------------------------------------- |
| **SIMPLE**            | 60,000 RWF     | 160,000 RWF     | Easiest to understand                          |
| **REDUCING\_BALANCE** | \~43,000 RWF   | \~143,000 RWF   | Most common, fair                              |
| **COMPOUND**          | \~43,000 RWF   | \~143,000 RWF   | Same as REDUCING\_BALANCE for monthly payments |

**Recommendation**: Use REDUCING\_BALANCE for standard loans. COMPOUND produces the same result for monthly installments.

***

## Interest Payment Timing

This determines **when** interest is collected.

### IN\_ADVANCE

Interest is deducted **upfront** from the member's savings balance.

#### Example: 500,000 RWF loan with 60,000 RWF total interest

**Disbursement**:

* Loan principal: 500,000 RWF
* Total interest: 60,000 RWF (calculated based on term and rate)
* **Interest deducted from member's savings**: 60,000 RWF
* **Amount member receives (cash)**: 500,000 RWF (full loan amount)

**Installments**:

* Each installment pays **principal only** (no interest)
* 12 monthly payments of 500,000 ÷ 12 = 41,667 RWF each

**When to use**:

* Microfinance model (common in some regions)
* Ensure interest is collected even if member defaults
* Simpler installment calculations (principal only)
* Member must have sufficient savings to cover the interest

**Note**: Member receives the full loan amount in cash, but their savings balance decreases by the interest amount.

***

### WITH\_INSTALLMENTS

Interest is **included in each payment** (amortized).

#### Example: 500,000 RWF loan at 5% monthly REDUCING\_BALANCE for 12 months

**Disbursement**:

* Loan principal: 500,000 RWF
* **Amount member receives**: **500,000 RWF** (full amount)

**Installments**:

* Each installment pays **principal + interest**
* Monthly payment: \~55,672 RWF (calculated using amortization)
* Total repayment: 55,672 × 12 = 668,064 RWF
* Total interest: 668,064 - 500,000 = 168,064 RWF

**When to use**:

* **Standard commercial loan structure**
* Member gets full loan amount
* Interest collected over time
* Most common and expected by members

<Note>
  **Recommended**: Use WITH\_INSTALLMENTS for transparent lending. Members receive the full amount and understand what they're paying each month.
</Note>

***

## Installment Type

This determines the **structure of payments**.

### EQUAL\_PRINCIPAL

Each payment has the **same principal amount**, but total payment decreases over time.

#### Example: 120,000 RWF at 5% monthly REDUCING\_BALANCE for 12 months

**Principal per payment**: 120,000 ÷ 12 = **10,000 RWF**

**Repayment schedule**:

| Month     | Balance Start | Principal   | Interest (5%) | Total Payment | Balance End |
| --------- | ------------- | ----------- | ------------- | ------------- | ----------- |
| 1         | 120,000       | 10,000      | 6,000         | **16,000**    | 110,000     |
| 2         | 110,000       | 10,000      | 5,500         | **15,500**    | 100,000     |
| 3         | 100,000       | 10,000      | 5,000         | **15,000**    | 90,000      |
| 4         | 90,000        | 10,000      | 4,500         | **14,500**    | 80,000      |
| 5         | 80,000        | 10,000      | 4,000         | **14,000**    | 70,000      |
| 6         | 70,000        | 10,000      | 3,500         | **13,500**    | 60,000      |
| 7         | 60,000        | 10,000      | 3,000         | **13,000**    | 50,000      |
| 8         | 50,000        | 10,000      | 2,500         | **12,500**    | 40,000      |
| 9         | 40,000        | 10,000      | 2,000         | **12,000**    | 30,000      |
| 10        | 30,000        | 10,000      | 1,500         | **11,500**    | 20,000      |
| 11        | 20,000        | 10,000      | 1,000         | **11,000**    | 10,000      |
| 12        | 10,000        | 10,000      | 500           | **10,500**    | 0           |
| **Total** | -             | **120,000** | **39,000**    | **159,000**   | -           |

**Key observations**:

* Payment starts high (16,000) and decreases each month
* Principal is constant at 10,000 per month
* Interest decreases as balance reduces
* Total interest: 39,000 RWF

**When to use**:

* Members want declining payment amounts
* Cash flow improves over time (seasonal business)
* Easier to track principal repayment

**Caution**: First payment is the highest, which may be hard for some members.

***

### EQUAL\_TOTAL (Most Common)

Each payment is the **same total amount** (amortized). Principal portion increases, interest portion decreases.

#### Example: 120,000 RWF at 5% monthly REDUCING\_BALANCE for 12 months

**Monthly payment** (amortization formula): **13,361 RWF**

**Repayment schedule** (same as shown in REDUCING\_BALANCE section above):

| Month | Balance Start | Payment    | Interest (5%) | Principal | Balance End |
| ----- | ------------- | ---------- | ------------- | --------- | ----------- |
| 1     | 120,000       | **13,361** | 6,000         | 7,361     | 112,639     |
| 2     | 112,639       | **13,361** | 5,632         | 7,729     | 104,910     |
| ...   | ...           | **13,361** | ...           | ...       | ...         |
| 12    | 15,426        | **13,361** | 771           | 12,590    | 0           |

**Key observations**:

* Payment is constant at 13,361 RWF every month
* Principal portion increases (7,361 → 12,590)
* Interest portion decreases (6,000 → 771)
* Total interest: \~43,000 RWF (slightly more than EQUAL\_PRINCIPAL due to amortization)

**When to use**:

* **Most loans use this structure**
* Predictable budgeting for members
* Consistent cash flow for organization
* Easy to explain: "You pay X amount every month"

<Note>
  **Recommended**: Use EQUAL\_TOTAL for most loans. Members appreciate knowing exactly how much to pay each month.
</Note>

***

## Installment Type Comparison

Same loan (120,000 RWF at 5% monthly REDUCING\_BALANCE for 12 months):

| Installment Type     | First Payment | Last Payment | Total Interest | Notes               |
| -------------------- | ------------- | ------------ | -------------- | ------------------- |
| **EQUAL\_PRINCIPAL** | 16,000 RWF    | 10,500 RWF   | 39,000 RWF     | Declining payments  |
| **EQUAL\_TOTAL**     | 13,361 RWF    | 13,361 RWF   | 43,000 RWF     | Consistent payments |

**Recommendation**: Use EQUAL\_TOTAL for consistent budgeting.

***

## Payment Allocation Order

When a member makes a payment, how is it split between principal, interest, and penalties?

### INTEREST\_FIRST

Pay all **interest** before applying to **principal**.

#### Example: 10,000 RWF payment when 3,000 interest + 7,000 principal is due

**Allocation**:

1. Interest: 3,000 RWF (paid in full)
2. Principal: 7,000 RWF (paid in full)
3. Total: 10,000 RWF

**Partial payment example**: 5,000 RWF payment when 3,000 interest + 7,000 principal is due

**Allocation**:

1. Interest: 3,000 RWF (paid in full)
2. Principal: 2,000 RWF (partial)
3. Remaining balance: 5,000 principal unpaid

**When to use**:

* **Most tontines use this**
* Ensures interest revenue is collected
* Protects organization's income
* Industry standard

***

### PRINCIPAL\_FIRST

Pay all **principal** before applying to **interest**.

#### Example: 10,000 RWF payment when 7,000 principal + 3,000 interest is due

**Allocation**:

1. Principal: 7,000 RWF (paid in full)
2. Interest: 3,000 RWF (paid in full)
3. Total: 10,000 RWF

**Partial payment example**: 5,000 RWF payment when 7,000 principal + 3,000 interest is due

**Allocation**:

1. Principal: 5,000 RWF (partial)
2. Interest: 0 RWF
3. Remaining balance: 2,000 principal + 3,000 interest unpaid

**When to use**:

* Member-friendly approach (reduces debt faster)
* Encourages borrowing (lower total interest if paying early)
* Less common in tontines

***

### PROPORTIONAL

Split payment based on the **ratio** of principal to interest.

#### Example: 10,000 RWF payment when 7,000 principal + 3,000 interest is due

**Ratio**: 7,000:3,000 = 70%:30%

**Allocation**:

1. Principal: 10,000 × 70% = 7,000 RWF
2. Interest: 10,000 × 30% = 3,000 RWF

**Partial payment example**: 5,000 RWF payment when 7,000 principal + 3,000 interest is due

**Ratio**: 7,000:3,000 = 70%:30%

**Allocation**:

1. Principal: 5,000 × 70% = 3,500 RWF
2. Interest: 5,000 × 30% = 1,500 RWF
3. Remaining balance: 3,500 principal + 1,500 interest unpaid

**When to use**:

* Fair for partial payments
* Balanced approach (both principal and interest reduce)
* Good for handling arrears

***

## Payment Allocation Comparison

Partial payment of 5,000 RWF when 7,000 principal + 3,000 interest is due:

| Allocation Order     | Principal Paid | Interest Paid | Remaining Debt                   |
| -------------------- | -------------- | ------------- | -------------------------------- |
| **INTEREST\_FIRST**  | 2,000 RWF      | 3,000 RWF     | 5,000 principal                  |
| **PRINCIPAL\_FIRST** | 5,000 RWF      | 0 RWF         | 2,000 principal + 3,000 interest |
| **PROPORTIONAL**     | 3,500 RWF      | 1,500 RWF     | 3,500 principal + 1,500 interest |

**Recommendation**: Use INTEREST\_FIRST to protect your organization's income.

***

## Recommended Loan Configurations

### Standard Commercial-Style Loan

**Use this for most loans:**

* **Interest Rate Type**: MONTHLY (easier for members to understand)
* **Interest Calculation**: REDUCING\_BALANCE (fair and industry standard)
* **Interest Timing**: WITH\_INSTALLMENTS (member gets full amount)
* **Installment Type**: EQUAL\_TOTAL (predictable payments)
* **Payment Allocation**: INTEREST\_FIRST (protects revenue)

**Example**: 500,000 RWF at 3% monthly for 24 months

* Monthly payment: \~27,000 RWF
* Total interest: \~148,000 RWF
* Member receives full 500,000 RWF

***

### Simple Short-Term Loan

**Use for small, short-term loans:**

* **Interest Rate Type**: MONTHLY
* **Interest Calculation**: SIMPLE (easy to understand)
* **Interest Timing**: IN\_ADVANCE (ensure collection)
* **Installment Type**: EQUAL\_PRINCIPAL (simple division)
* **Payment Allocation**: INTEREST\_FIRST

**Example**: 100,000 RWF at 5% monthly for 6 months

* Total interest: 100,000 × 0.05 × 6 = 30,000 RWF
* Member receives: 100,000 - 30,000 = 70,000 RWF
* Monthly payment: 100,000 ÷ 6 = 16,667 RWF

***

## Common Questions

<AccordionGroup>
  <Accordion title="Which calculation type charges the most interest?">
    **Ranking (highest to lowest total interest) for monthly installment loans:**

    1. **SIMPLE** - Constant interest on original principal
    2. **REDUCING\_BALANCE** - Interest decreases as principal is repaid
    3. **COMPOUND** - Same as REDUCING\_BALANCE for monthly payments

    **Example** (100,000 RWF at 5% monthly for 12 months):

    * SIMPLE: 60,000 RWF total interest
    * REDUCING\_BALANCE: \~43,000 RWF total interest
    * COMPOUND: \~43,000 RWF total interest (same as reducing balance)

    **Note**: COMPOUND only charges more if interest is allowed to accumulate without payments.
  </Accordion>

  <Accordion title="Can I change loan rules after creation?">
    **Mostly no.** Interest rate, calculation type, installment type, and payment allocation cannot be changed after the loan is created.

    **What you CAN change:**

    * Increase principal amount (loan modification)
    * Extend loan period (loan modification)
    * Modify individual installment amounts
    * Modify individual due dates
    * Apply or waive penalties

    **What you CANNOT change:**

    * Interest rate
    * Interest calculation type
    * Installment type
    * Payment allocation order
    * Decrease principal amount
    * Shorten loan period

    **If you created the wrong loan type:**

    * Contact your accountant about options
    * May need to write off and recreate (requires careful accounting)
  </Accordion>

  <Accordion title="What's the difference between 5% monthly and 60% yearly?">
    **If using SIMPLE interest:**

    * 5% monthly × 12 = 60% yearly (equivalent)

    **If using REDUCING\_BALANCE:**

    * 5% monthly ≠ 60% yearly
    * 5% monthly results in much higher effective annual rate
    * Always clarify which you mean

    **Recommendation**: Use MONTHLY rates for clarity in tontines.
  </Accordion>

  <Accordion title="Why does REDUCING_BALANCE have less total interest than SIMPLE?">
    **SIMPLE**: Interest is calculated on the full principal for the entire term.

    * Example: 100,000 × 5% × 12 = 60,000 RWF

    **REDUCING\_BALANCE**: Interest is only charged on the remaining balance, which decreases each month.

    * Example: Month 1 on 100,000, Month 2 on 91,667, Month 3 on 83,333, etc.
    * Total: \~43,000 RWF

    As principal is repaid, you're paying interest on less and less.
  </Accordion>
</AccordionGroup>

## Need Help?

<CardGroup cols={2}>
  <Card title="Creating Loans" icon="plus" href="/tontines/loans/creating-loans">
    Step-by-step loan creation guide
  </Card>

  <Card title="Modifying Loans" icon="pen-to-square" href="/tontines/loans/modifying-loans">
    Change installments or increase principal after creation
  </Card>

  <Card title="Recording Payments" icon="money-bill-transfer" href="/tontines/loans/recording-loan-payments">
    Track member repayments
  </Card>

  <Card title="Glossary" icon="book" href="/reference/glossary">
    All loan-related term definitions
  </Card>
</CardGroup>