The short version
APR and simple interest are two ways of pricing the same loan.
- APR (annual percentage rate) charges interest on what you still owe. As you pay the loan down, the interest gets smaller. Home loans work this way.
- Simple interest charges a fixed percentage of the amount you borrowed, and that's it. Most short-term business loans work this way.
Neither one is always cheaper. They suit different jobs. The trap is comparing a number from one system with a number from the other. Below is what each means and how to compare them.
What do APR and simple interest rate mean?
APR is the rate worked out on what you still owe, shown per year. Borrow $500K for a home at 6% and you pay interest each month on the balance still owing. Over 30 years you repay about $1.08M in total. The interest comes to $579K, more than you borrowed, just because you had the money for so long.
Simple interest is easier to work out. It's a fixed percentage of the original amount. Borrow $10K at 11% simple interest for 6 months and the sum is $10,000 x 0.11 x 0.5 = $550. That's the whole interest bill, and you know the dollar cost before you sign.
Why you can't compare the two numbers directly
The difference is time. APR spreads the cost over a year, so a short loan can look expensive as an APR while costing very little in dollars. That $10K loan costs $550. Worked out the bank's way, that's an APR of about 18.6%. Same loan, same $550, but one number sounds fine and the other sounds steep.
It works the other way too. The 6% home loan sounds cheap, and per year it is. But over 30 years it costs $579K. A high APR on a short loan can cost you fewer real dollars than a low APR held for decades.
So if one lender quotes "11%" and another quotes "18.6%", they could be describing the same deal. You can't tell until you put both in the same terms.
Why business loans get quoted differently
Personal loans fall under the National Credit Code, which makes lenders advertise a comparison rate. That's one number, worked out the same way by every lender.
Business loans sit outside that law. There's no standard, so banks tend to quote APR-style rates and short-term lenders tend to quote simple interest. Both are legitimate. You just need to know which one you're looking at.
The easy way to compare two business loans
Ignore the headline rates and ask each lender the same two questions:
- How much will I pay back in total, in dollars?
- What do I owe if I pay it off early?
Total payback puts every loan in the same terms, whichever way it was quoted. The early payout question matters because some short-term loans lock in the full interest on day one, while APR-style loans charge less if you finish early.
Fees come on top of the rate and have their own rules. We cover those in the true cost of a business loan.
Using these terms to your advantage
If you need money for a short job, a simple interest quote tells you the dollar cost straight away, and the dollar cost is what counts. If you're borrowing for years, the annual rate is the number to negotiate, because time multiplies it.
If you've got two quotes worked out two different ways, a broker can sort that out. We put business lending offers side by side in the same terms every day. The application form takes under a minute, and most enquiries get a response within four business hours.