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Two lenders can quote the same loan in ways that look completely different — one leads with a daily rate, another with a monthly figure, a third with an APR. None is dishonest, but comparing them requires understanding what each number means and how the interest is actually calculated. This guide walks through the mechanics so you can read any offer, translate between the formats, and focus on the number that matters most: the total amount you will repay.
The building block: the interest rate and the balance
At its core, interest is a charge for the use of money over time. It is calculated by applying a rate to a balance for a period. The two things that change how much you pay are therefore the rate and how the balance behaves over the life of the loan. A loan where you repay steadily has a falling balance, so the same rate produces less interest over time than a loan where the full balance stays outstanding until the end.
This is why the headline rate alone never tells you the full cost. You also need to know the term, how the balance reduces, and any fees.
Daily interest: charged only for the days you borrow
Some business lenders, including Credicorp, charge interest as a daily rate on the outstanding balance. The logic is straightforward and transparent: you are charged a small percentage of what you owe, each day, for as long as you owe it. If you repay early, you stop accruing interest from that day — you are not charged for days you did not use the money.
Daily interest suits short-term business borrowing well. If you take a facility to bridge a 40-day gap and repay on day 35, you pay interest for 35 days, not 40. This alignment between the cost and the actual time you hold the funds is one of the clearest structures for a borrower to reason about — the cost is proportional to use.
To work out the cost under a daily rate, you multiply the outstanding balance by the daily rate for each day it is outstanding. Where you make regular repayments, the balance falls over time, so the daily interest charge falls too. Our cost of borrowing calculator does this arithmetic for you and shows every pound.
Monthly interest: the same idea over a longer period
A monthly rate applies the same principle over a calendar month rather than a day. A monthly rate of, say, 2% applied to the outstanding balance produces the interest for that month. Over a multi-month term with regular repayments, the balance falls each month and so does the interest charged, in the same way as with a daily rate. The main practical difference is granularity — monthly interest does not reward early repayment within a month as precisely as daily interest does.
APR: a standardised annual comparison figure
APR — annual percentage rate — is a standardised way of expressing the cost of borrowing as a yearly figure, including certain fees. Its purpose is comparison: because every lender calculates APR the same way, it lets you compare fundamentally different products on one axis. However, APR can be misleading for short-term borrowing. Because it annualises the cost, a facility you hold for only a few weeks can show a high APR even when the actual pounds paid are modest. APR answers "what would this cost expressed as a year?" — not "what will I actually pay for this short-term facility?"
For short-term business loans, the APR is useful for comparing against other products but should never be read in isolation. A 40-day facility with a high-looking APR may cost far less in real money than a 12-month loan with a lower APR, simply because you hold it for a fraction of the time.
The number that matters most: total repayable
Whatever format the rate is quoted in, the figure that tells you the truth is the total amount repayable — the sum of the principal plus all interest and fees over the life of the loan. This single number lets you compare any two offers directly, regardless of whether they are quoted daily, monthly or as an APR. When you receive an offer, always find the total repayable and the total cost of credit (total repayable minus the amount borrowed). If a lender cannot or will not show you these clearly, that is itself informative.
Fees change the real cost
Interest is not the only cost. Arrangement fees, service fees and early repayment charges all affect the true cost of a facility. An arrangement fee is often expressed as a percentage of the amount borrowed and may be added to the balance or deducted from the advance. When comparing offers, add every fee to the interest to get the genuine total cost — a lower interest rate with a high arrangement fee can cost more than a higher rate with no fee.
How to compare two offers properly
To compare offers on a like-for-like basis: first, find the total repayable for each over the same term and amount. Second, confirm what the rate is charged on (the outstanding balance, or the original amount throughout — the latter is more expensive). Third, check whether early repayment saves interest. Fourth, add every fee. The offer with the lowest genuine total cost, for the term you actually need, is the cheaper one — regardless of which had the more attractive headline rate.
Frequently asked questions
- Is a daily interest rate more expensive than a monthly one?
- Not inherently. A daily rate is simply a finer-grained way of charging interest on the outstanding balance. Whether it works out cheaper or more expensive than a monthly rate depends on the actual rates involved and how the balance behaves. The advantage of a daily rate is that it charges you only for the exact days you hold the money, so repaying early stops interest immediately. To compare fairly, convert both to the total repayable over the term you need.
- Why does a short-term loan have such a high APR?
- APR annualises the cost of borrowing, so a facility held for only a few weeks shows a high APR even when the pounds paid are small. APR is designed for comparing year-long products; for short-term borrowing it exaggerates the apparent cost. Always look at the total repayable in pounds for the actual period you will hold the facility, not the annualised percentage, to understand what a short-term loan really costs.
- Do I save money by repaying a daily-interest loan early?
- With a genuine daily-interest structure, yes — because interest accrues on the outstanding balance each day, repaying early stops further interest from that day. You should still check the agreement for any early repayment charge, which some lenders apply and which would offset part of the saving. Where interest is charged daily on the reducing balance and there is no early repayment penalty, clearing the balance sooner directly reduces what you pay.
- What is the difference between the interest rate and the total cost of credit?
- The interest rate is the charge applied to your balance; the total cost of credit is the sum of all interest plus all fees over the life of the loan. The total cost of credit is the more meaningful figure because it captures everything you pay above the amount borrowed, including arrangement and service fees the headline rate does not show. When comparing loans, compare the total cost of credit, not the rate alone.