Flat Rate vs APR — What Is the Difference?
A flat rate is the simplest way to express interest. If a lender charges a 5% flat rate on a £20,000 loan over five years, you would pay £1,000 interest per year regardless of how much you have already repaid. This overstates the true cost because your outstanding balance falls with every payment, yet interest is still calculated on the original amount.
APR corrects for this by calculating interest on the reducing balance and then annualising the result. Because flat-rate loans charge interest on the full original sum throughout the term, the equivalent APR is typically close to double the flat rate — so a 5% flat rate loan may equate to around a 9% to 10% APR. Always compare APR figures, not flat rates, when looking at secured loans.
Some lenders still quote flat rates in their marketing materials. If you see a headline rate that looks surprisingly low, check whether it is a flat rate or APR before drawing comparisons. A reputable broker will always present you with the APR alongside the total amount repayable so you can make a fair comparison.
How Is Secured Loan APR Calculated?
Lenders calculate APR by working out all the cash flows associated with the loan — the amount borrowed, each monthly repayment, any mandatory fees included in the loan, and the final repayment date. The rate that makes the present value of all outgoing payments equal to the loan amount is the APR. It is essentially an internal rate of return calculation performed in reverse.
Mandatory lender fees that are added to the loan are included in the APR calculation, which is why a loan with a high product fee will show a higher APR than an otherwise identical loan without fees, all else being equal. Optional fees — such as a broker fee paid separately — are not required to be included, so two loans with the same APR but different broker fees could have a different total cost in practice.
Because APR is expressed as a yearly figure, the length of the loan term affects how significant a fixed fee appears within the calculation. A £500 arrangement fee spread over a ten-year loan has a smaller effect on the APR than the same fee spread over a two-year loan, which is one reason why short-term loans can appear to carry very high APRs.
