Loans Are Lenders Cheating On APR's?
Author: Michael Challiner

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.

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

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.

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.


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