Flat versus reducing
A flat rate charges interest on the original amount for the whole term, even as you repay. Because you owe less over time, the true rate on the money you actually still owe is much higher, roughly double for typical terms.
The reducing-balance rate is the rate charged on what's left each month, which is how you can compare it with standard loans.
Worked example
A £10,000 loan at a 6% flat rate over 3 years costs £1,800 in interest, with payments of £327.78 a month. The equivalent reducing rate is about 11.1% and the APR about 11.7%.
What to compare
Always compare loans on APR or reducing rate, not flat rate.
Inputs for the loan calculator reducing rate
Amount borrowed
The amount of the loan.
Flat interest rate (per year)
The flat rate you've been quoted, charged on the original amount for the whole term.
Term
How many years the loan lasts.
CALCULATOR QUESTIONS
Reducing rate loan calculator questions
Why is the reducing rate higher than the flat rate?
Because a flat rate keeps charging interest on money you've already repaid.
How much higher is it?
Roughly double for typical terms; in the example, 6% flat is about 11.1% reducing.
Which do UK lenders use?
UK quotes must show the APR, based on the reducing balance.
What's the difference between APR and the interest rate?
The interest rate is what's charged on the balance. The APR also includes compulsory fees and the effect of compounding, so it's the better figure for comparing deals.