When you take out a loan in Nigeria, the bank officer tells you your Monthly Repayment (often called EMI). But have you ever wondered how they come up with that number?
Sometimes, the "Flat Rate" they quote gives a very different result from what you actually pay. Understanding the math can help you spot hidden fees.
The Formula
The standard formula for calculating monthly repayments on a Reducing Balance loan is:
E = P x r x (1 + r)^n / ((1 + r)^n - 1)
Where:
- E = Monthly Payment (EMI)
- P = Principal Loan Amount (e.g., ₦1,000,000)
- r = Monthly Interest Rate (Annual Rate / 12 / 100)
- n = Loan Tenure in Months (e.g., 12 months)
Nigerian Example
Let's say you borrow ₦500,000 from a bank at 24% annual interest for 1 year (12 months).
-
Calculate Monthly Rate (r):
- 24% per year / 12 months = 2% per month.
- 2% = 0.02
-
Apply the Formula:
- E = 500,000 x 0.02 x (1.02)^12 / ((1.02)^12 - 1)
- E = 10,000 x 1.268 / 0.268
- E ≈ ₦47,280
So, you will pay ₦47,280 every month. Total Payment = 47,280 x 12 = ₦567,360. Total Interest = ₦67,360.
Watch Out for Management Fees!
In Nigeria, banks also charge upfront fees:
- Management Fee: usually 1% (₦5,000)
- Insurance: usually 1% (₦5,000)
These are deducted from the loan amount before it lands in your account. So you might borrow ₦500k but only receive ₦490k, yet you still pay interest on the full ₦500k!
Why Calculate Manually?
Manual calculation is good, but mistakes happen. Our Loan Calculator does this instantly and lets you compare different Nigerian bank rates.
Try it now to check if your bank's offer is fair!
Written by Calc Labo Research Team