What is the difference between APR and flat rate car finance?
APR and flat rate finance refer to different methods of car funding. We explain the differences...
There are many different forms of car finance, and it can be difficult to understand the differences and the terminology.
One of the most crucial distinctions is between APR and flat interest rates. You can come across both when shopping for a new car on finance, but they’re very different things.
APR stands for Annual Percentage Rate of charge. It’s the most common way of calculating the interest you’ll pay on a loan and refers to both the percentage of interest on money you have borrowed as well as any fees issued with the loan.
For example, a 5% APR loan might only be 4% in interest alone, but there may have been a 1% fee involved in arranging the loan, so the APR illustrates the total amount payable.
Though the APR will remain the same for the life of the loan, it applies only to money you still owe. This means that whatever money you’ve paid off is no longer subject to charges.
For example, if you took out a loan of £10,000 to finance a new car with 3% APR and after a year you’d paid off £3000, you would only be paying 3% on the remaining £7000 at that point in time.
Generally, the APR is considered the most transparent way of telling you exactly how much car finance will cost over its lifetime. UK loans are legally required to be issued with an APR, too.
However, make sure the rate you are quoted is definitely annual. It should be, but some less scrupulous companies quote monthly APRs, which appear to be low, but are actually extremely high. A monthly APR of 3%, for example, is actually 43% per year, which is very expensive.
Flat rate loans will generally have lower annual interest rates than APRs, but be careful, because that doesn’t mean they’re better value.
The crucial difference between a flat rate and an APR is that you consistently pay interest on the amount of money that you borrowed at the beginning of the loan throughout its lifetime. It doesn't take into account any money you have repaid.
For example, if you borrowed £10,000 over five years to finance a new car with an interest rate of 2%, you would continue to pay 2% interest on the whole £10,000 every year. With APR, you only pay interest on the money you still owe.
Flat rates are generally less common than APRs, but they still exist and they are often used to make loans appear cheaper than they really are and are not as transparent. All loans issued in the UK are legally required to be presented with an APR rate, so ask to see this if you’re not sure.
Whatever method of funding you choose, make sure you check the small print and understand exactly how much you will be paying and for how long before you commit to a purchase. Our car finance page can help you understand the different types of funding available.
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