Flat rate vs APR: how to compare business loans

What a flat rate actually charges

A flat rate applies interest to the full amount you originally borrowed for the entire term, regardless of how much you have already repaid. Borrow £20,000 over two years at a 10% flat rate and you are charged £2,000 a year — £4,000 in total — even though your outstanding balance falls every month as you pay it down.

That is the catch. By the final months you might owe only a few thousand pounds, yet you are still being charged interest as though you owed the full £20,000. A flat rate is simple to quote and easy to understand, which is exactly why it appears so often in advertising — but it consistently makes borrowing look cheaper than the true cost of the money.

Why APR tells the truth

APR — the annual percentage rate — measures interest against your reducing balance and folds in compulsory fees, so it reflects what the credit genuinely costs over a year. Because a flat rate ignores the fact that your debt shrinks, the equivalent APR is always materially higher. As a rough rule of thumb, the APR on a fully amortising loan is close to double the headline flat rate, though the exact multiple depends on the term and repayment frequency.

A 6% flat rate, then, is not a 6% APR — it is more like 11–12% once you account for the falling balance. Understanding the difference is the single most useful skill when reading finance offers, and it sits alongside knowing how business loan interest works.

Converting a flat rate to a comparable cost

You do not need to do the maths by hand. The reliable approach is to ignore the quoted rate altogether and look at two figures the lender must be able to give you: the total amount repayable and the representative APR. Total repayable tells you the cost in pounds; APR lets you line two offers up fairly even when the terms differ.

If a lender will only quote a flat rate and resists giving you an APR or a total repayable, treat that as a warning sign. To translate any offer into a true cost and compare it against an alternative, run the numbers through the true cost of borrowing calculator.

Comparing offers fairly

To put two loans side by side, convert both to the same basis — APR and total repayable — and only then compare. A loan with a higher flat rate but a shorter term can easily cost less in pounds than a lower flat rate stretched over longer, because you are exposed to the inflated charge for less time. Never compare a flat rate from one lender against an APR from another; they are different scales.

For short-term facilities, weigh the total cost in pounds heavily, because a high APR on a loan repaid in weeks can still be cheap in absolute terms. The framework for this is in how to compare finance options. This guide is educational and not financial advice.