Flat rate vs APR: why a 'low' rate can cost more

How a flat rate works

A flat rate applies to the amount you originally borrowed for the entire term, regardless of how much you have repaid. So on a £10,000 loan at 6% flat over two years, you pay 6% of £10,000 every year — even in the final months when you owe far less. The effective cost is much higher than 6%.

Why APR tells the truth

The APR charges interest only on the balance still outstanding, which falls as you repay. That is how real reducing-balance lending works. A 6% flat rate typically converts to an APR somewhere near 11–12% — nearly double. Always ask for the APR before comparing.

A rough conversion

As a rule of thumb, the APR on a flat-rate loan is roughly 1.8 to 1.9 times the flat rate for a standard term. It is only a guide — the exact figure depends on the term and repayment schedule — but it stops a 5% flat rate masquerading as cheaper than a 9% APR.

Where flat rates appear

Flat rates are common in some asset finance and short-term lending. They are not inherently bad, but they must be compared on an APR basis against reducing-balance loans, or you will choose the more expensive option believing it is cheaper.

Convert and compare

Use the calculator to see the real cost of a flat-rate quote and set it against a reducing-balance loan.

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