What this calculator works out
Some credit is still advertised using a flat rate, particularly motor and retail finance. A flat rate charges interest on the whole amount you originally borrowed for the whole term, even though you are paying the balance down every month. It makes a loan look considerably cheaper than it is.
This calculator converts a flat rate, or a monthly payment you have been quoted, into an approximate APR — the measure that accounts for a falling balance and includes compulsory fees, and the one that lets two offers be compared honestly.
As a rule of thumb, an APR is a little under twice the equivalent flat rate. A 5% flat rate over four years is nearer 9.6% APR.
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Before you calculate
- A flat rate charges interest on the whole original amount for the whole term, even though you are steadily paying the balance down.
- An APR charges interest only on what you still owe, and includes compulsory fees. It is the figure lenders must quote so that offers can be compared.
- As a rough guide, an APR is a little under twice the equivalent flat rate on a typical loan. A 5% flat rate is not a 5% loan.
Borrow £8,000 over four years at a 5% flat rate and you pay 5% of £8,000 every year for four years — £1,600 in total. But your average balance across those four years is only around £4,000, because you are repaying throughout. Paying £1,600 to borrow an average of £4,000 is much nearer 9% a year than 5%.
How this calculator works
If you enter a flat rate, the total interest is calculated first, then spread evenly across the term:
Total interest = amount × flat rate × years
Monthly payment = (amount + interest + fees) ÷ monthsThe calculator then works backwards to the true periodic rate — the monthly rate at which the present value of all the payments equals the amount you actually received. That is found by iteration, because it cannot be rearranged algebraically. The annual figure is the monthly rate compounded over twelve months, which is how APR is defined.
APR = ((1 + monthly rate)12 − 1) × 100This is a close approximation of the statutory calculation, not the statutory calculation itself. Real APRs follow a prescribed method that handles irregular payment dates, deferred first payments and certain charges in specific ways. Treat the result as a fair comparison figure rather than a quotable APR.
Worked example: £8,000 over four years
A dealership offers £8,000 over 48 months at a 5% flat rate, with no fees:
- Total interest: £8,000 × 5% × 4 years = £1,600
- Total repayable: £9,600
- Monthly payment: £9,600 ÷ 48 = £200
- True cost expressed as an APR: about 9.6%
The advertised 5% and the actual 9.6% describe the same deal. If a competing lender offers 7.9% APR, it is cheaper despite the larger headline number.
Common mistakes
- Comparing a flat rate against an APR. They are not the same measure. Convert first.
- Ignoring fees. Arrangement and documentation fees belong in the APR, and a low rate with a large fee can be the more expensive deal.
- Judging a deal by the monthly payment. Lengthening the term lowers the payment and raises the total cost.
- Assuming the advertised APR is the one you will get. Representative APR need only be offered to 51% of accepted applicants.
- Forgetting the balloon payment. On PCP agreements the optional final payment changes the picture entirely.
Frequently asked questions
What is the difference between a flat rate and an APR?
A flat rate charges interest on the full original amount for the whole term, ignoring the fact that you are repaying it. An APR charges interest only on the outstanding balance and includes compulsory fees. Because your balance falls throughout the term, an APR is typically a little under twice the equivalent flat rate.
Is a flat rate legal to advertise?
Flat rates still appear in some motor and retail finance, but consumer credit advertising rules require a representative APR to be shown wherever a rate or incentive is quoted, so that offers can be compared on the same basis. If you are shown only a flat rate or a monthly payment, ask for the APR before signing.
Why is the APR here slightly different from the lender's?
The statutory APR calculation follows a prescribed method covering payment timing, deferred first payments and the treatment of particular charges. This calculator uses the standard present-value approach with regular monthly payments, which matches closely on a straightforward loan but will not reproduce every lender's figure exactly. Use it to compare, not to quote.
What is a representative APR?
The APR that the lender expects to give to at least 51% of people who are accepted. The rest may be offered a higher rate depending on their circumstances, so the advertised figure is not a guarantee.
Does a longer term make a loan cheaper?
It lowers the monthly payment but raises the total interest, because you owe money for longer. The APR may look similar while the total cost is substantially higher. Always compare the total amount repayable alongside the rate.
Should I use this to decide whether to borrow?
Use it to compare offers, not to decide whether borrowing is wise. This page is general information rather than financial advice. For free and impartial guidance, MoneyHelper is the place to start, and a debt adviser if repayments are already difficult.
Is what I enter stored?
No. Figures are processed in your browser and never transmitted or retained.
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References
These organisations publish the guidance and figures behind this page.
- Financial Conduct Authority — consumer credit rules, including how APR and representative APR must be disclosed
- MoneyHelper — free and impartial government-backed guidance on borrowing and debt
- GOV.UK — consumer credit legislation and where to find a regulated debt adviser
This page is general information, not financial advice. If repayments are already difficult, speak to a free debt adviser before taking on more credit.