Flat Rate
An interest calculation method where interest is charged on the original loan amount throughout the term, rather than on the declining balance.
A flat rate is a method of expressing interest where the rate is applied to the original loan amount for every year of the term, regardless of how much has been repaid. This is commonly used in asset finance and hire purchase to calculate monthly payments.
A flat rate is always lower than the equivalent APR. A flat rate of 5% per annum on a three-year loan is approximately equivalent to an APR of 9-10%, because the APR reflects the fact that you are repaying the loan progressively and the average balance is roughly half the original amount.
Always ask for both the flat rate and the APR when comparing asset finance quotes. The flat rate is useful for calculating monthly payments quickly, but the APR is the correct measure for comparing total cost across different facilities.
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