Flat rate versus APR on a personal loan
No. A flat rate is charged on the original amount for the entire term, even though you are steadily paying that amount off, so the same two digits mean roughly twice as much money. Borrow 12,000 over 48 months and 7.9% flat costs 3,792 in interest against 2,034.85 on a 7.9% APR loan, an extra 1,757.15 for the same headline number. Convert before you compare: the APR is the only figure every lender has to define the same way.
Month by month
| 1 | $329.00 | $79.00 | $250.00 | $11,750.00 | $79.00 |
| 2 | $329.00 | $79.00 | $250.00 | $11,500.00 | $158.00 |
| 3 | $329.00 | $79.00 | $250.00 | $11,250.00 | $237.00 |
| 4 | $329.00 | $79.00 | $250.00 | $11,000.00 | $316.00 |
| 5 | $329.00 | $79.00 | $250.00 | $10,750.00 | $395.00 |
| 6 | $329.00 | $79.00 | $250.00 | $10,500.00 | $474.00 |
| 7 | $329.00 | $79.00 | $250.00 | $10,250.00 | $553.00 |
| 8 | $329.00 | $79.00 | $250.00 | $10,000.00 | $632.00 |
| 9 | $329.00 | $79.00 | $250.00 | $9,750.00 | $711.00 |
| 10 | $329.00 | $79.00 | $250.00 | $9,500.00 | $790.00 |
| 11 | $329.00 | $79.00 | $250.00 | $9,250.00 | $869.00 |
| 12 | $329.00 | $79.00 | $250.00 | $9,000.00 | $948.00 |
An estimate, not financial advice. Figures are illustrative and depend on assumptions listed below. Check anything you plan to act on with a qualified adviser or the provider itself.
The worked example below, drawn. The balance falls slowly at first because the early instalments are mostly interest.
A flat rate is roughly half the APR it corresponds to, so double it in your head before comparing a flat quote with an APR quote.
On 12,000 over 48 months, 7.9% flat comes out at 15.14% APR and costs 1,757.15 more than 7.9% APR does.
Settling a flat-rate loan early saves less than you would expect, because the whole interest charge was fixed on the day it was drawn.
How it works
The formula
A rate charged on what is still owed:
i = r / 12 a yearly rate, interest charged monthly
i = (1 + r) ^ (1/12) - 1 an effective yearly rate (UK and EU APR)
payment = P x i / (1 - (1 + i) ^ -n)
A flat rate, charged on the original amount for the whole term:
interest = P x r x (n / 12)
payment = (P + interest) / n
The APR, recovered from the instalments by bisection. Find the monthly
rate j at which:
advance = sum over k = 1..n of payment(k) / (1 + j) ^ k
APR, nominal = j x 12
APR, compounded = (1 + j) ^ 12 - 1
where
r = the advertised rate, as a decimal
n = the term, in months
P = the amount borrowed plus any fee added to the loan
advance = the cash actually handed over, which excludes a financed fee
What it assumes
- Every instalment is paid in full, one month apart, with the first one a month after the money arrives. A lender that takes the first payment on the day of drawdown is charging a slightly higher APR than this shows.
- The rate is fixed for the whole term. A variable rate is not modelled, and neither is a promotional rate that ends part way through.
- An arrangement fee is added to the loan rather than paid up front, so it is repaid with interest over the term. That is exactly why it raises the APR rather than leaving it alone.
- Interest is rounded to the cent every month, the way a lender's ledger does it, and the last instalment absorbs whatever the rounding left behind. It is normally within a few cents of the others.
- On a flat-rate loan the interest is fixed on the day the loan is drawn, and it is spread evenly across the instalments here. A lender using the Rule of 78 front-loads it instead, which changes neither the total nor the monthly payment and matters only if you settle early.
- Payment protection insurance, late fees and early settlement charges are not included. Every one of them makes the real cost higher than the figure shown.
Common questions
Why is a flat rate quoted at all?
Because it produces a smaller-looking number for the same loan, and in some markets it is simply the convention — car finance and short-term business lending both use it. UK and EU consumer credit advertising must show the APR, which is why the two figures appear together and disagree.
How do I convert a flat rate to an APR roughly, in my head?
Slightly less than double it, for a loan repaid in equal instalments over one to five years. A 5% flat rate is around 9.5% APR over three years. The rule works because you pay interest on the full original balance throughout while owing, on average, a little over half of it.
Sources
Method written and checked by Tessalor on Jul 30, 2026.
The full method, worked example and every assumption behind this figure are on Loan Repayment Calculator.