Loan interest in Cambodia: flat vs declining, plus fees

Two loans in Cambodia quoted at the same interest rate can cost very different amounts. What changes the cost is how the interest is charged and which fees come with the loan. This guide shows the difference with one example, and lists the fees to ask about before you sign.

Flat rate or declining balance

With a declining balance, interest is charged only on what you still owe, so it shrinks as you pay the loan back.

With a flat rate, interest is charged on the full amount you borrowed every month, even after you have paid most of it back.

Lenders in Cambodia often quote a rate per month, such as 1.2% a month. On a declining balance that is 14.4% a year before fees. On a flat rate the real yearly rate is much higher, as the example below shows. Microfinance institutions are required to charge interest on the declining balance, so if you are quoted a flat rate, ask for the declining-balance figure.

One loan, two ways of charging interest

$5,000.00 over 24 months at 1.2% a month, with a $100.00 processing fee:

The flat-rate loan costs $655.73 more, at the same quoted rate.

Compare loans by their real cost

The monthly payment alone does not tell you which loan is cheaper. Compare two numbers instead:

• The total you repay: every payment plus every fee.
• The real yearly rate: what the loan costs per year once fees are counted and interest is measured against what you really still owe.

In 2017 the National Bank of Cambodia capped the interest microfinance institutions may charge at 18% a year. The cap covers interest, not fees, so ask for the fee list too. An accountant is confirming the cap is still in force.

Fees to ask about

Ask the lender for their full fee list, in writing, before you sign:

• Processing or admin fee, often a percentage of the loan, taken when it is paid out.
• Credit report (CBC) fee, for checking your credit history with the Credit Bureau Cambodia.
• Insurance the lender requires, such as credit life insurance.
• Valuation and registration fees, when the loan is secured on land or a vehicle.
• Early repayment penalty, if you pay the loan off before the end.
• Late payment fees and penalty interest.

In the loan calculator, enter the fees you will pay for certain (processing, CBC, required insurance, valuation and registration) as totals over the whole loan. Leave out penalties, which apply only if you pay early or late. The calculator then shows the real yearly rate with fees counted.