APR's or Annual Percentage Rate of interest are supposed to be a
reliable basis on which the public can judge the true cost of the
money they borrow. But can the figures be relied on? This article
comments.
A pound from one lender is as good as a pound from another. So
when you're shopping for a loan, the key issue becomes the interest
rate. Consequently, when you read press advertisements and visit web
sites, the APR of interest highly influences which lenders or loan
brokers you apply to. After all, the government introduced APR's as
a standard calculation that every lender has to use, precisely to
help the public make reliable comparisons.
Tricks Are Being Played
But who's checking that the APR's are calculated correctly? Could
some be cheating by promoting a lower APR than the rate they're
entitled to? The commercial success of a promotion can be hugely
improved by a really low APR. We think some must be tempted, don't
you? In a survey 92% of all loan advertisements checked quoted an
APR Typical. (You'll find below, a detailed explanation of what APR
actually means including its variants). The APR Typical means that
at least 66% of applicants approved for a loan are offered that APR
rate or cheaper .
No one included in that two thirds will have been offered a
higher rate than the stated APR Typical . The problem is that no
independent body is checking these figures. So the system is open
for cheating. The Office of Fair Trading (OFT) regulates the selling
of Personal loans but even they admit that their resources are over
stretched and they only check on a reactive basis. We think that's
administrative speak for hardly ever!
The influential trade magazine Moneyfacts, has twice raised the
same concerns with the OFT asking them what checks are carried out
on the APR's quoted by lenders. After all lenders can get to the top
of that magazine's Best-Buy Tables with a low APR and win
significant amounts of business as a result.
The OFT clearly needs to do more.
Understanding APR's
What Is APR
APR is short for 'Annual Percentage Rate'
It illustrates the true cost of the money borrowed
on loans, mortgages, and credit cards, and by law, consumers must
be provided with that information
The APR calculation takes into account the basic
interest rate, any initial fees, when interest is charged (i.e.
daily, weekly, monthly or annually) and any other costs you have
to pay
As all lenders are legally required to calculate
APR the same way, it should enable consumers to make meaningful
cost comparisons between lending products
So if one finance company is offering you a loan at 5.6% plus an
application fee of £100 and another is offering you an interest rate
of 5.8% with no fees, then a comparison of the APR figures will
prove which of the loans is cheapest.
What Is APR Variable
When you see APR with the word Variable written
after it, this means that the interest rate can vary whilst you
are repaying the loan - the interest rate is not fixed.
What Is APR Variable Typical
This variant is used in 92% of all loan
advertisements
It means that the advertiser can't be specific
about the interest rate applicants will be offered as their rates
vary, usually in response to the applicant's personal credit
ratings and the amount of money they want to borrow
Therefore, APR Variable Typical is used to give
the public a general impression of the interest rates currently on
offer from that lender
The addition of the word Typical means that at
least 66% of applicants approved for a loan are offered that rate
or cheaper
Then when a loan offer is confirmed, the paperwork
will reveal the actual APR or APR Variable actually being offered
Don't forget that the word Variable within the
description also means that the interest rate isn't fixed and may
vary from time to time, go up or down.
What Is APR Typical
This is the same as APR Variable Typical except
that the interest rate is not variable - it is fixed for the
duration of the loan
