With a flat rate, your interest is calculated based on the original amount borrowed.
Unlike APR, a flat rate does not consider the amount of you have paid-off. Instead, your cost of interest remains the same across each year of the repayment period.
Let’s say you borrowed £10,000 over 48 months at a flat rate of 12%.
After 12 months you have repaid a quarter of your loan, but your Interest Rate is still calculated based on the original amount borrowed.
This means your annual cost of interest is £1,200 (12% of £10,000), regardless of the outstanding finance on your agreement.
Whilst a flat rate is based on the original amount borrowed, APR takes into consideration the remaining finance owed.
Put simply, the amount of interest you pay is adjusted to the amount of finance outstanding.
So, if you borrow £10,000 over 48 months with an APR of 12%, the cost of interest would be reduced after the first year, to reflect the amount you have repaid.
When considering your loan offers, you should always compare like for like.
Flat rates are often displayed as a lower percentage to make a loan look more appealing, but this won’t always guarantee you a better rate as you’re still paying the interest on the original amount borrowed.
FCA regulated finance providers such as Creditplus, are legally required to include an APR on your Consumer Credit Agreement, so you can be sure you’re comparing like for like.
You can also find a clear breakdown of your cost of interest on the SECCI Form. All regulated credit providers must provide you with a SECCI form prior to entering an agreement.
If you do not receive one, be sure to request this from the finance provider.
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