Loans Can APR’s be relied on?
When you’re shopping for a loan the interest rate becomes the key issue. So when you visit web sites and read advertisements in the press, the universal judge of price becomes the Annual Percentage Rate of interest (APR) that’s on offer. After all, the government introduced APR’s as a standard calculation that every lender must use, precisely to enable the public to make reliable comparisons.
But who’s checking that the advertised APR’s are correct? Are the lenders cheating by promoting a lower APR than the one they are entitled to? The commercial success of a promotion can be hugely boosted by a really low APR so some must be tempted.
Reports show that 92% of all loan advertisements quote an APR Typical. (See below for a detailed explanation of what APR actually means). That’s the rate that the lender offers to two thirds of people applying for a loan. The problem is that no independent body is checking these figures. The system is open for cheating. Personal loans are regulated by the Office of Fair Trading but even they admit that their resources are stretched and they only check on a reactive basis. We think that’s administrative speak for hardly ever!
Understanding APR’s
APR
APR stands for “Annual Percentage Rate”. It describes the true cost of the money borrowed on loans, mortgages, and credit cards. And you must by law, be provided with the information.
The APR calculation takes into account the basic interest rate, when it is charged (i.e. daily, weekly, monthly or annually), any initial fees and other costs you have to pay. As all lenders are supposed to calculate APR in exactly the same way, it enables the public to make meaningful cost comparisons between lending products.
So if one finance company is offering you a loan at 5.9% plus an application fee of £75 and another is offering you an interest rate of 6.1% with no fee, then the APR figures will show you which of the two loans is cheapest.
APR Variable
When you see APR with the word Variable after it, this means that the interest rate is not fixed and may vary from time to time, up or down.
APR Variable Typical
This is the variant used in 92% of all advertisements for loans. It means that the lender cannot be totally specific about the interest rate you’ll be offered as their rates vary, usually in response to each applicant’s personal credit rating and the amount of money to be borrowed. 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 to you, your paperwork will reveal the actual APR or APR Variable you personally are 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, up or down.
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.
