How is business loan interest calculated?

2 min read

Total repayableThe figure to compare

Flat ≠ APRA 6% flat rate is far higher as APR

The two ways interest is charged

With reducing-balance (or APR-style) interest, the rate is applied to the amount you still owe. As you make repayments the balance falls, so the interest portion of each payment shrinks over time. This is how most term loans and credit facilities work, and APR is the standardised way to express it.

With a flat rate, interest is calculated on the original sum borrowed for the entire term, regardless of how much you've already repaid. Because you keep paying interest on money you've handed back, a flat rate produces a higher true cost than the same percentage as an APR.

A worked example

Take an illustrative £20,000 over 12 months. At a 6% flat rate you'd pay £1,200 in interest (6% of £20,000), making £21,200 repayable. The same loan at 6% reducing balance would cost far less in interest, because by month six you only owe around half the original sum.

To compare offers fairly, ignore the headline percentage and look at one number: the total amount repayable. That captures interest and fees together and lets you line up a flat-rate quote against an APR-based one on equal footing. These figures are illustrative, not a Credicorp quote.

Where fees fit in

Interest is only part of the cost. An arrangement or facility fee may be charged up front or added to the balance, and APR is designed to fold mandatory fees into a single annualised figure — which is why an APR is usually higher than the bare interest rate. A flat rate quoted on its own often excludes fees, so ask what the all-in cost is.

For a short-term working-capital facility, the term is short, so the absolute pounds of interest are smaller than on a multi-year loan even when the percentage looks similar. See the difference between APR and flat rate for a deeper comparison.

What this means for your company

When you weigh up finance, ask the lender for the total repayable and the full repayment schedule before you sign. That tells you the real cost and exactly what leaves your account each week or month, which is what your cash flow actually feels. Remember that the interest portion is normally tax deductible for a limited company, which lowers the effective cost.

Because Credicorp lends to the company with no personal guarantee, the cost is borne by the business and budgeted from business cash flow.

Frequently asked questions

Is a flat rate cheaper than an APR?

No — it usually costs more for the same number. A flat rate charges interest on the full original sum for the whole term, while APR reflects interest on the falling balance. Compare the total repayable, not the headline rate.

What does APR include that an interest rate doesn't?

APR rolls mandatory fees into a single annualised figure and reflects interest on the reducing balance, so it gives a more complete picture of the cost than the bare interest rate alone.

How can I check the real cost?

Ask for the total amount repayable and the full repayment schedule. Those two figures let you compare any two offers like for like, whatever rate format each uses.