Loans Are lenders cheating on APR's?

APR's 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.

Loans Are lenders cheating on APR's?

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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 Annual Percentage Rate of interest (APR) 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.

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.

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.

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.

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.

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.

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.

Readers please note : You should undertake your own background checks before taking any action on any aspect mentioned in this article. Where the author has mentioned specific product details or given examples of how companies have reacted to specific situations, these should be correct as far as the author is aware when this article was written. In some cases additional background information not mentioned in the article has been used in obtaining the examples. Some examples or quotes may have been taken from information available in the public domain where all the background details may not be available. Insurers do change policy conditions and underwriting approach. They will view each situation on its own merits.

You should be aware that details of the topics written about within the articles can change. Therefore, always check out the current position before taking any action. You should also check that any action you are considering, or any proposed purchase, is suitable for your personal circumstances.