Comparing Personal Loans: Declining Balance Interest vs Front-Loaded Interest
When you’re borrowing money, whether for a car, a home improvement project, or to cover unexpected expenses, it’s easy to focus on the monthly repayment figure and forget to look at how interest is calculated. But how the interest is charged can have a huge impact on the total cost of your loan.
As your local Credit Union, we believe in fair lending. That’s why we use a declining balance interest model, a method that works in your favour, not ours.
Here’s why that matters.
What is Declining Balance Interest?
When you take a loan from a Credit Union, interest is typically calculated on the reducing balance this means interest is only charged on the amount you still owe, not the full loan amount from day one.
So as you make repayments, your balance goes down and so does the interest you’re charged.
Example: Let’s say you borrow £1,000 over 12 months from a Credit Union:
- In month 1, you’re charged interest on the full £1,000.
- In month 2, you’re charged interest on what’s left say £915.
- By month 6, you might only owe around £500, so interest is calculated on that lower figure.
- By the end of the loan, you’ve paid interest only on what you actually owed at each point in time not the full amount up front.
This can lead to significant savings over the life of the loan, especially if you make any early repayments.
Front-Loaded Interest: A Costly Alternative
Many banks and high-street lenders use a system where interest is front-loaded often called “flat rate” or “fixed cost” loans.
With this model, they calculate your interest on the full loan amount, and apply it upfront, regardless of how quickly you repay the loan.
Example: Borrow £1,000 at a 20% flat rate
- You’re charged £200 interest no matter how quickly you repay it.
- Even if you repay early, the interest doesn’t decrease. Some lenders also charge you for making repayments early.
- This often results in paying more than you would with a Credit Union loan, even though the advertised rate might look similar (or lower).
Credit Union Loans: Save As You Borrow
What makes Credit Union loans even more unique is that we encourage you to save while you repay.
Here’s how that works:
- Each time you make a loan repayment, a small amount is also placed into a savings account in your name.
- When you finish repaying the loan, not only is your debt cleared but you’ve built up savings too.
- These savings are yours to withdraw, or you can use them to build a stronger financial cushion.
This simple approach turns borrowing into a positive financial habit, not just a necessary evil.
📌 Save the extra of what you would have repaid using other providers with the Credit Union.
Why Choose a Credit Union?
Credit Unions are not-for-profit financial co-operatives. That means:
- We don’t charge hidden fees or penalties for early repayments.
- We offer fair rates, flexible terms, and genuine support with your financial goals.
- Your savings and borrowing help others in your community through the cooperative model.
- We reinvest or share any profit with our members
We’re here to help you build financial resilience, not debt.
The Bottom Line
Feature | Credit Union Loan | High-Street/Payday Loan |
Interest type | Declining Balance | Front-loaded or Flat Rate |
Repayment flexibility | No penalties for early payment | Often penalties or no benefit |
Cost over time | Cheaper, especially with early repayment | Often more expensive |
Extra savings | Save while you repay | No savings benefit |
Community benefit | Member-focused, local impact | Profit-driven |
📌 You can use our Loan Calculator Sliders to check the interest and repayments needed before you apply.
Think Smarter, Borrow Fairer
Borrowing is sometimes unavoidable but how you borrow matters. A Credit Union loan with interest calculated on a declining balance puts you in control, saves you money, and encourages healthy financial habits.
💡 Already have a loan with us? Consider topping up or paying off early to save even more.
💰 Not yet a member? Join your local Credit Union today and experience the fairer way to borrow.
👉 And remember: you can save with every loan repayment and take a step toward becoming a saver too.