Difference between Flat Rate and APR

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.