How Are Interest Rates Calculated?

It is not unreasonable to be confused by the different interests rates quoted by companies. Some quote the 'Flat Rate', some the 'APR' and some the 'True Rate'.

At Zebra we believe that customers should receive quotes that are completely transparent without any ambiguity or hidden charges. Here we attempt to explain the difference between the terms so that you can better understand what you are being quoted. 

APR
The most common rate that you will see quoted is the 'APR'. This stands for Annual Percentage Rate. This is the government dictated calculation that all companies must show when offering consumers credit. It is designed to offer the customer a standardised approach so that you can compare quotes on a consistent basis. The APR protects the customer from hidden charges in the event that payments are missed and shows the total additional charges payable (interest and penalty fees) if no payments are made from the outset.

This is a useful calculation to ensure that consumers are protected however it does not show the customer accurate comparisons if all payments are made. It is possible for payments to be lower than a competitor but the APR to be higher!

Flat Rate
The Flat Rate is a calculation method traditionally used by the motor industry to quickly calculate the monthly customer payment. The rate is applied to the amount borrowed and then multiplied by the number of years of the agreement.

So using the example below, £10,000 x 4.64% = £464 x 4 years = £1,856 interest

£1,856 interest + £10,000 borrowed = £11,856 / 48 months = £247

This does not mean that the customer does not get the benefit of reducing their outstanding debt but merely a quick and simple calculation method. This does not take into account any fees or penalty interest.

True Rate
As the name suggests, this is the rate which is applied to the amount borrowed (usually on a monthly basis) and perhaps the calculation method that is most relational to the monthly payment. That is to say that customers should see lower payments where the true interest rate is lower but of course customers should also factor in the fees when comparing quotes.

Example

A customer borrows £10,000 over 4 years.

The flat rate is 4.64%, the APR is 10.5% and the true rate is 8.61%.
The document fee is £175 and the monthly repayment is £247.
The table below shows the approximate calculation methods;