Flat rate vs APR: what is the real cost?
Asset finance quotes are often given as a flat rate, which looks low next to an APR. Here is how the two differ, how to convert one to the other, and how to compare quotes properly.
The short answer
A flat rate charges interest on the full amount for the whole term, even though you are paying the balance down every month. The effective annual rate (APR) measures the cost against what you still owe, so for the same agreement it is a good deal higher: a 6% flat rate over 36 months works out at roughly 11.7% a year.
Flat rate to APR converter
On £10,000 that is about £258 a month, and £2,400 in total interest over 48 months.
Approximate: assumes equal monthly payments in arrears, with no fees, deposit or final payment. Business finance conventions can differ from consumer credit, so treat this as a guide to compare quotes, not a quote.
Worked examples
Each row assumes equal monthly payments in arrears, with no fees, deposit or final payment. Figures are illustrative, not a quote.
| Flat rate | Term | Effective annual rate |
|---|---|---|
| 5% | 36 months | 9.72% |
| 6% | 36 months | 11.66% |
| 6% | 60 months | 11.40% |
| 8% | 48 months | 15.33% |
| 10% | 60 months | 18.71% |
Why lenders quote flat rates
A flat rate is easy to calculate and easy to explain, and it gives a smaller headline number than the equivalent APR. That is not dishonest, but it means a flat rate can only be compared with another flat rate on the same term. Put a flat-rate quote next to a quote given as an APR and the flat one will look cheaper when it may not be.
How to compare two quotes
- Ask for the amount financed, the monthly payment, the number of payments and the total amount payable on each quote.
- Include any arrangement or documentation fee, and any option-to-purchase or final payment, in the total.
- Compare the totals, then convert any flat rates to an effective rate so the percentages mean the same thing.
- Check whether the deposit and VAT are treated the same way in both quotes. See VAT on asset finance.
For how the structures differ, see hire purchase vs finance lease vs contract hire. To see payments on a vehicle or machine you have in mind, use the finance calculator.
Frequently asked questions
What is the difference between a flat rate and an APR?
A flat rate charges interest on the original amount for the whole term, even though you are repaying it as you go. An APR measures the cost against the balance you still owe, so it comes out higher for the same agreement. The two numbers describe the same cost in different ways and cannot be compared directly.
How do I convert a flat rate to an APR?
Work out the total repayable (the amount plus the flat interest for the full term), divide by the number of months to get the monthly payment, then find the monthly rate that makes those payments worth the amount borrowed today. Compound that monthly rate over twelve months for the annual figure. The converter on this page does this for you.
How do I work out the APR from a flat rate?
Enter the flat rate and the term in months in the converter above. As a rough guide the effective rate on typical terms comes out at close to double the flat rate. Fees, a deposit or a final payment change the result.
Why do lenders quote flat rates?
A flat rate is simple to calculate and gives a lower-looking headline number than the equivalent APR. It is not wrong, but it is only comparable with another flat rate on the same term. Ask for the total payable as well.
Is a lower flat rate always the cheaper deal?
Not necessarily. Fees, the deposit, a final payment and the term all affect what you actually pay. Compare the total amount payable and the amount financed on each quote, not just the headline percentage.
Is the converted rate a quote?
No. The converter gives an approximate effective rate on the assumption of equal monthly payments in arrears with no fees, deposit or final payment. Business finance conventions can differ from consumer credit, so the figure on a lender’s agreement is the one that counts.
Related guides
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