Flat rate is a term used to describe a type of interest that is always based on the initial amount borrowed at the start of the agreement. It does not take into account any of the monthly payments made across the length of the car finance agreement.
When you have a car finance agreement that works on a flat rate of interest, it is calculated based on the initial amount borrowed. Unlike APR or other types of interest, it is solely based on the original sum borrowed and does not take into account the amount of money you have paid off.
The best way to explain is with an example. Let’s say we are borrowing £15,000 across five years at a flat rate of interest set at 5%. The interest on the loan each year is set at 5%, so in this example it would be £750 per year. The length of loan is five years, so the total interest is £3,750. The total repaid would therefore be £18,750.
Let’s say you repay a total of £4,000 per year. In the fifth year of the agreement, despite the amount owed having been reduced by £16,000 you are still paying interest based on the initial sum of £15,000.
The primary difference between flat rate and APR is that in an APR package, the amount of interest you pay is adjusted to the amount left outstanding to repay. That means that across the term of your car finance package, the amount of interest paid will reduce as it is based on the amount left outstanding on your car finance agreement.
Choosing the right finance rate is a vital part of the car finance process. Our Customer Advisors are fully trained and FCA regulated to ensure that all our customers are provided with all the information they need to make the right decision on their car finance arrangements. We won’t just find you the best deal, we’ll also provide you with a clear breakdown of costs so you can see if the car finance package is right for you.
"A flat fee, also referred to as a flat rate or a linear rate, refers to a pricing structure that charges a single fixed fee for a service, regardless of usage. Rarely, it may refer to a rate that does not vary with usage or time of use. Another term used is "flate", a hybrid of "flat" and "rate"…
Source: Flat Rate Wikipedia
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