Essentially an APR (Annual Percentage Rate)
is a simple calculation of the repayments based upon a combination
of four factors - the actual interest rate itself, when it is
charged (i.e. weekly, monthly or yearly), set-up fees and any
other miscellaneous costs. All four of these factors are combined
to calculate the APR, which as the name suggests is an annual
interest figure.

A flat rate loan, on the other hand, quotes
a permanent rate of interest based upon the total sum of the
loan.

Herein lies the essential difference between
flat rate and APR – the percentage interest on a flat
rate quotation will be constant for the duration of the loan,
based upon the total amount borrowed. Thus if the sum of £10,000
is borrowed at a flat rate of 7% over a period of five years,
then each year the borrower will be required to pay £2,000
in repayment of the loan, plus £700 in interest. When
the first four years have passed the borrower will only owe
£2,000 on the loan, yet will still be required to pay
£700, the flat rate of interest, which by this time will
of course amount to 35% of the remaining balance.

By contrast an APR requires one only to pay
interest on the outstanding balance. So if the same borrower
was to take out a finance package at an APR of 10% then in the
first year £1,000 would be repayable on the same £10,000
loan, but after four years of repayments and with £2,000
left to pay, only £200 would be repayable in interest
and even this amount would decline as additional payments are
made.

It is important therefore when taking out a
loan or looking for credit to recognise the difference between
flat rate and APR, because a lower flat rate does not necessarily
mean you will pay less and in practice usually doesn’t.