APR and flat rate interest explained

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When you're looking for car finance, you may come across quotes for 'APR' and 'flat rate' interest. Here, we’ll look at what they both mean and how you can use them to find the best deal on your car finance.

What are interest rates?

When you borrow money from a lender, you normally pay interest on your repayments. Interest is extra money you have to pay the lender you borrowed it from.

The interest rate tells you how much more you have to pay over and above the amount you borrowed. Interest rates are commonly shown as a percentage of what you borrow, for example you’ll pay an extra 4.5% back.

When looking at interest rates, you’ll most likely see a quote for the annual percentage rate (APR), though you may occasionally come across flat rate.

• With flat rate, you’re always paying 4.5% on the original amount of money you borrowed. The monthly interest rate doesn’t change.
• With APR, you’re paying 4.5% of your remaining debt. So, as you make more repayments, your APR goes down as you owe less money.

Let’s look at that in more detail.

What is flat rate interest?

With flat rate interest, you make consistent interest payments on the original amount of money you borrowed. Flat rate interest doesn’t consider any repayments you’ve already made. You’ll pay the same amount at the end of your contract as you did at the start.

Flat rate example

If you borrow £10,000 and have an annual flat rate of 5%, you’ll pay £500 in interest every year. After one year, you’ve repaid 25% of your loan, but the interest remains £500. After three years, you’ve repaid 75% of your loan, and the interest is still £500 for the year.

Comparing APR with flat rate interest

Flat rates presented as a percentage can appear cheaper than APRs, but this can be misleading because APR interest payment gradually decrease over time – whereas flat rate interest payments remain the same.

On average, flat rate interest payments can end up being more expensive over the lifetime of a loan than APR. For a fair and accurate comparison between deals, use the APR quote.

What is APR?

Annual percentage rate (APR), is the total rate of interest charged against the money you borrow. This means APR include the fixed interest rate, plus extra costs and fees (like admin charges) into consideration.

APR is a helpful comparison tool when looking at finance deals, and all loans issued in the UK, including car finance, must be presented with an APR rate. So, if you’re looking to make a fairer comparison between deals, you can use the APR rate.

With APR, you pay a set amount of interest on your remaining debt and you don’t have to pay interest on any amount you’ve already paid off. This means your APR interest payments will decrease as you pay off more of your outstanding debt.

Just note that APR only includes compulsory charges. This means things like payment protection insurance (PPI) aren’t included in the APR, so you should always check the contract for any non-compulsory charges.

APR car finance example

You borrow £6,000 over 48 months with a representative APR of 20.3%. This gives you an annual interest rate of 18.6%.
If you gave a deposit of £0.00, the amount payable would be £178 a month, with a total cost of credit of £2,544 and a total amount payable of £8,544.

Want to run the numbers on a car finance deal? You can use our free car finance calculator

What’s the difference between representative APR and personal APR?

Representative APR is usually the advertised rate. If at least 51% of those who are accepted for a credit deal can get this APR, it is classed as representative. That does mean, however, that 49% of those accepted may not be eligible for the advertised rate and may have to pay more – so always check your contract and confirm your personal APR.

Personal APR is the rate you actually pay. This could be the same as the representative APR, or higher depending on a number of factors including your credit and financial status.

What is a good APR?

The best interest rates are the ones you can afford to repay every month. Always check your contract and budget to ensure you can make monthly payments.

APR can be anything from 5% to 30% and, generally, the higher a deposit you put down, the lower your APR interest will be.

Another factor that can affect your personal APR is your credit rating. Those with the highest credit ratings are sometimes offered lower interest rates.

Check free and impartial sites like the Money Advice Service or Citizen’s Advice for more information of credit ratings and interest rates.

What is 0% APR?

Some car finance deals are advertised as 0% APR. These are interest-free loans, i.e. you don’t pay any interest on your monthly payments and your money goes directly to paying off the car.

You’ll need a very strong credit rating to qualify for 0% APR deals. You may also find the monthly repayments are higher than deals with low APR, because 0% APR deals are shorter, so you make fewer, bigger monthly payments.

Learn more about 0% car finance deals.

How to get the best deal

When comparing car finance deals, look for and use the APR for a more direct comparison. UK lenders are legally required to provide the APR.

Some lenders may quote the flat rate interest because it looks cheaper than APR. Over the lifetime of your repayments, you may find that you’re paying more though as your flat rate remains the same, while APR decreases.

Also check that the APR quoted is annual and not monthly. Monthly APRs can look much lower, but over the lifetime of your repayment it can add up to a higher overall sum. A monthly APR of 3%, for example, ends up being 43% APR annually.

Head over to our car finance jargon buster for more terms explained.

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