Flat rate vs APR: why one deal shows two different numbers
Asset finance is usually quoted as a flat rate. Bank loans and regulated agreements are quoted as an APR. They are not the same measure, and comparing one against the other will always make the flat rate look cheaper than it is.
A flat rate is charged on the full amount you borrowed, for every year of the agreement, even though your balance is falling the whole time. An APR is charged on the balance you still owe and includes compulsory fees. Because you owe on average about half the original sum across a normal term, the same agreement expressed as an APR comes out close to double the flat rate.
A deal quoted at 5.15% flat is roughly 9.9% APR. Same deal. Same pounds. Two conventions.
The same agreement, both ways
These are the figures from this site’s representative example, taken apart. Hire purchase, borrowing £50,000 over 48 months at a flat rate of 5.15%.
| Amount borrowed | £50,000 |
|---|---|
| Term | 48 months |
| Flat rate | 5.15% a year |
| Interest, flat basis | £50,000 × 5.15% × 4 years = £10,300 |
| Total amount repayable | £60,300 |
| Monthly payment | £60,300 ÷ 48 = about £1,256 |
| Equivalent APR | 9.9% APR representative |
The flat rate never changes: 5.15% of £50,000 every year, four years running. But you do not owe £50,000 for four years. You owe less every month, and by the final year you owe very little — while still paying interest calculated on the full original figure.
Work backwards from the payment and you get the other number. A payment of about £1,256 that clears £50,000 over 48 months implies roughly 0.79% a month on the balance actually outstanding, which annualises to 9.9%. Nothing has been added. £10,300 is the cost of finance on either view; only the percentage used to describe it has changed.
Representative example: on hire purchase, borrowing £50,000 over 48 months at a 5.15% flat rate (equivalent to 9.9% APR representative), you would repay around £1,256 a month; total amount repayable approximately £60,300, of which £10,300 is the cost of finance. Indicative only and not a quote or an offer of finance. Your rate depends on the asset, the term, the deposit and your business’s circumstances. All finance is subject to status, affordability and lender approval.
Why asset finance quotes a flat rate at all
It is not concealment, it is arithmetic that can be done in your head. A flat rate makes the monthly payment trivially easy to derive and easy to adjust in conversation — change the deposit or the term and both parties can recalculate on the spot. That matters in a market where a deal is often agreed over the phone against an asset the buyer is standing next to.
The convention becomes a problem in exactly one situation: when a flat rate is compared against an APR as though they were the same measure. Put a 5.15% flat asset finance quote next to a 7.9% APR bank loan and the asset finance looks cheaper by a wide margin. Converted properly it is the more expensive of the two. The comparison was never between 5.15% and 7.9%; it was between about 9.8% and 7.9%.
This is also why an APR exists in the first place. It was defined so that two agreements of different shapes could be compared with one number, which a flat rate cannot do.
When you will be shown an APR, and when you will not
The requirement to express a cost as an APR comes from consumer credit regulation. It applies to regulated agreements — broadly lending to individuals, and to sole traders below the regulated threshold. For those agreements the APR has to be disclosed, and a representative APR governs how rates may be advertised.
Most asset finance written for a limited company is unregulated business lending. There is no requirement to quote an APR, and the market convention is a flat rate. Nothing is being hidden: ask for the total amount payable over the full term and any lender will give it to you. That single figure is more useful than either percentage, because it cannot be reshaped by the convention it is quoted in.
“What is the total amount payable, including every fee, over the full term?” Ask it of every quote you are comparing. Two answers in pounds, over the same term, settle the question completely.
Try it on your own numbers
The calculator quotes a flat rate, with the equivalent APR directly beneath it. Move the term and watch the gap between the two widen — a longer agreement means you spend longer owing less than the figure the flat rate is charged on.
Prime is an established, profitable business with clean credit. Specialist covers newer businesses and credit that needs explaining — the asset itself carries part of the risk, which is why finance is often available where an unsecured loan is not.
Rates shown are indicative flat rates with the equivalent APR alongside — the two are not the same number. Indicative only and does not constitute a quote or an offer of finance. Subject to status and lender approval.
Common questions
What is the difference between a flat rate and an APR?
A flat rate is calculated on the full amount you originally borrowed, for every year of the agreement, regardless of how much you have already paid back. An APR is calculated on the balance you still owe, which falls every month, and it also includes any compulsory fees. Because an asset finance agreement repays steadily, the average amount you actually owe over the term is roughly half what you started with — so expressing the same cost against that smaller average balance produces a number close to double the flat rate. Neither figure is wrong; they measure different things.
Why is the APR higher than the interest rate I was quoted?
Two reasons, and they stack. First, if the rate you were quoted was a flat rate, it was charged against the whole original balance while an APR is charged against the reducing balance, which roughly doubles the number. Second, an APR is defined to include compulsory charges such as documentation or option-to-purchase fees, where a quoted interest rate normally excludes them. A higher APR on the same agreement is not a sign that something has been added — it is the same cost, measured more completely.
How can an APR be lower than the interest rate?
In asset finance it generally is not, and if you are comparing a flat rate to an APR the APR will almost always be the higher of the two. An APR can come out below a headline rate in a few specific situations: where the headline figure is a monthly rate that has been annualised differently, where a manufacturer or supplier is subsidising part of the interest, or on a promotional agreement where the cost is carried elsewhere. If you have a quote where the APR is lower than the stated interest rate, it is worth asking the lender to show you the total amount payable, because the two figures are being derived on different bases.
Does an APR include fees?
Yes, that is the main thing it adds. An APR is intended to capture the total cost of credit as a single annual percentage, so compulsory fees that are a condition of the agreement are built into it — documentation fees and option-to-purchase fees being the common ones in asset finance. Charges that are not a condition of taking the finance, such as a penalty for a late payment that may never happen, sit outside it. A flat rate includes none of this, which is part of why the two numbers diverge.
Does a business asset finance quote have to show an APR?
Not usually. The duty to disclose an APR comes from consumer credit regulation, so it applies to regulated agreements — broadly, lending to individuals and sole traders below the regulated threshold. Most asset finance written for a limited company is unregulated business lending, where there is no requirement to express the cost as an APR and the market convention is to quote a flat rate instead. That is a reason to ask for the total amount payable rather than to assume anything is being withheld. Any lender will give you it.
How should I compare two asset finance quotes?
Compare the total amount payable and the monthly payment over the same term, not one rate against another. Add up every payment in the agreement, plus any compulsory fees, and subtract what you are borrowing — that is the cost of credit, in pounds, and it cannot be made to look smaller by changing the convention it is quoted in. Then check the term matches, because a longer term lowers the monthly figure while increasing the total. If one quote is a flat rate and the other an APR, converting between them is the only way to compare the percentages honestly, and even then the pounds are the clearer test.
Where to next
- Asset finance explained — how hire purchase, finance lease and operating lease differ, and which suits which asset.
- Capital allowances on financed assets — what you can claim, and the part of a payment you cannot.
- Business asset finance — the main page, with the lender panel and what is needed to apply.
CW Asset Finance is a credit broker, not a lender, and will receive a commission from the lender that funds your agreement. The figures on this page are indicative, are not a quote or an offer of finance, and are included to explain how the two conventions relate. All finance is subject to status, affordability and lender approval. Tax treatment depends on your circumstances and is a matter for your accountant.