The APR or Annual Percentage Rate was introduced by the
Government to make it easier to compare the true cost of loans,
mortgages, overdrafts, etc and enable consumers to see at a glance who
was offering the best rates. Sadly, many of the financial institutions
in the market place seem to have differing views on the exact makeup of
the APR, often resulting in inaccurate data being presented.
What Is The APR And How Is It Calculated
In essence the APR should represent the true cost of any loan, the equivalent interest rate you pay when taking into account all charges associated with the loan. Well, that is the principal behind the APR figure but even though it was introduced by the Government these quoted rates are not monitored by any official body, and are often open to abuse.
The makeup of the APR figure includes such information as :-
· the basic rate of interest
· initial fees to set up the transaction
· when interest is charged (daily, weekly, monthly)
· plus any other costs associated with the transaction (e.g. compulsory insurance cover, etc)
Sounds simple? In theory it is very simple but it depends how the information is presented and above all, the small print. For example you may see the following offers in the press :-
· We offer loans at rates as low as 6% APR.
· We offer loans at rates as low as 5.9% APR (plus a £100 initial set-up fee)
Initially your eyes would be drawn to the lower APR of 5.9%, but would you notice the extra initial charge of £100? When taken into account in the APR (as it should be) the extra charge may well push the "true" APR over 6%, making it more expensive than the flat 6% APR (which seems to include ALL charges). This is the kind of slight of hand that some financial institutions will use to draw in business.
Why Do Some Institutions Use This Tactic?
There are two reasons why some financial institutions may use this form of "calculation" :-
1. To catch the eye of the consumer in the street, or an existing banking client.
2. To rise to the top of the financial comparison tables.
The financial magazines and trade press are very influential and crucial elements of the financial industry. The many companies in the market will fight tooth and nail to get there services and offerings in the top league tables.
Once you have walked through the door, or contacted the financial institution in question, they have done the hard part. Next stage......selling you "A" product.....
What Is The APR And How Is It Calculated
In essence the APR should represent the true cost of any loan, the equivalent interest rate you pay when taking into account all charges associated with the loan. Well, that is the principal behind the APR figure but even though it was introduced by the Government these quoted rates are not monitored by any official body, and are often open to abuse.
The makeup of the APR figure includes such information as :-
· the basic rate of interest
· initial fees to set up the transaction
· when interest is charged (daily, weekly, monthly)
· plus any other costs associated with the transaction (e.g. compulsory insurance cover, etc)
Sounds simple? In theory it is very simple but it depends how the information is presented and above all, the small print. For example you may see the following offers in the press :-
· We offer loans at rates as low as 6% APR.
· We offer loans at rates as low as 5.9% APR (plus a £100 initial set-up fee)
Initially your eyes would be drawn to the lower APR of 5.9%, but would you notice the extra initial charge of £100? When taken into account in the APR (as it should be) the extra charge may well push the "true" APR over 6%, making it more expensive than the flat 6% APR (which seems to include ALL charges). This is the kind of slight of hand that some financial institutions will use to draw in business.
Why Do Some Institutions Use This Tactic?
There are two reasons why some financial institutions may use this form of "calculation" :-
1. To catch the eye of the consumer in the street, or an existing banking client.
2. To rise to the top of the financial comparison tables.
The financial magazines and trade press are very influential and crucial elements of the financial industry. The many companies in the market will fight tooth and nail to get there services and offerings in the top league tables.
Once you have walked through the door, or contacted the financial institution in question, they have done the hard part. Next stage......selling you "A" product.....
