Why isn't a flat rate the same as an APR?

2 min read

~2xRough APR vs flat multiple

On original amountNot the reducing balance

Looks cheaperThan it really is

Convert to compareAlways to APR/total

What a flat rate actually charges

A flat rate applies the interest percentage to the full original loan amount every year of the term, regardless of how much you have already repaid. So if you borrow £20,000 over two years at a 6% flat rate, you are charged 6% of £20,000 in year one and 6% of £20,000 again in year two — even though your average balance over the two years is far below £20,000. See flat rate in the glossary.

Why the APR is roughly double

A reducing-balance rate — which APR expresses — charges interest only on what you still owe. As you repay, the balance falls and so does the interest. Because a flat rate keeps charging on the full amount, its true annualised cost is close to double the flat figure. A '6% flat' loan often works out near 11–12% APR. This is why comparing a flat-quoted product against an APR-quoted one at face value is misleading.

See why a flat rate is more expensive than it looks.

How to compare fairly

Never compare a flat rate against an APR directly. Convert both offers to the total amount repayable on the same drawdown and term, or ask each lender to quote an APR-equivalent. Flat rates are common on asset finance and some short-term products, and are not dishonest — but you must annualise them before judging value.

The true cost of borrowing calculator does the conversion. Read the APR vs factor rate guide too.

Frequently asked questions

Is a flat rate ever a good deal?

It can be, once you have converted it to a true cost and compared it fairly. Flat rates are simple to understand and common on asset finance, where they are competitive. The mistake is judging a flat number against an APR at face value — do the conversion first, then a flat-rate product may well win on total repayable.

How do I convert a flat rate to an APR?

The quick approximation is to roughly double the flat rate, but that is only a guide. The accurate way is to compute the total interest (loan × flat rate × years), add fees, and work out the annualised cost against the reducing balance over the schedule. A true-cost calculator does this automatically — enter the flat figure and it returns the comparable annual cost.