What is the difference between APR and a flat rate?

What a flat rate means

A flat rate is calculated on the original amount you borrowed and stays fixed for the whole term, regardless of how much you've repaid. Borrow £10,000 at a 10% flat rate over a year and the interest is £1,000 — 10% of the original £10,000 — even though your outstanding balance falls every month as you make payments. That's the catch: you keep paying interest as if you still owed the full amount, when in reality you owe less and less. Flat rates look simple and reassuringly low, which is exactly why they're worth scrutinising.

What APR means

APR — annual percentage rate — measures the true yearly cost of borrowing on the balance that actually remains, and it folds in fees as well as interest. Because it's calculated on the reducing balance rather than the original amount, it reflects what the finance genuinely costs you. APR exists precisely to make different offers comparable on a single, honest basis: two loans with very different flat rates and fee structures can be ranked fairly by their APR. It is the more accurate figure, even though it looks higher than a flat rate on the same loan.

Why the flat rate always looks lower

Here's the part that trips people up: a flat rate is roughly half the equivalent APR. A 6% flat rate can work out near 11–12% APR on the same loan. That's not a trick of the lender's wording — it's arithmetic. Because a flat rate charges interest on the full original amount while you're actually paying the balance down, the effective cost on the money you still owe is much higher than the flat number suggests. So comparing one lender's flat rate against another's APR is comparing two different things, and it will always make the flat-rate offer look cheaper than it is.

What this means for your company

Never compare a flat rate against an APR — you'll mislead yourself. Compare like with like: APR against APR, or better still compare the total amount repayable, which sidesteps the rate-presentation question entirely. If a lender quotes only a flat rate, ask for the representative APR and the total cost before deciding. See how much does a business loan cost? and what is a good interest rate for a business loan?, or view the business loans page.