Defined
What Is Flat Rate?
A flat rate is interest charged on the whole amount you borrowed for the entire term, even as you pay the balance down. It looks lower than APR but costs roughly twice as much in real terms.
A flat rate is a tempting figure because it looks low — but it ignores the fact that your balance shrinks every month. APR is the figure you should compare on, and a flat rate roughly doubles when converted to a representative APR.
How a flat rate works
A flat rate charges interest on the original balance every year, not the falling balance — so you pay interest on money you've already repaid. That's why it understates the true cost.
As a rough guide, a flat rate of around 5% works out close to a 9.9% APR once converted. Lenders must quote a representative APR by law, so always ask for it and compare deals on APR, never on a flat rate.
A worked example
Borrow £18,000 at a 5% flat rate over 48 months and you'd pay £3,600 in interest (£18,000 × 5% × 4 years) — but the representative APR is closer to 9.9%.
Worked example
Frequently asked
What is a flat rate of interest?
Is a flat rate cheaper than APR?
How do you convert a flat rate to APR?
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