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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?

Author: Michael Challiner

A pound from one lender is as good as a pound

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from another. So when you're shopping for a cheap 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. < Articles on car insurance >

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.

You'll now also see many banks and building societies illustrating their typical APR for a narrow cross-section of loan sizes, choosing to ignore loan sizes that attract higher rates, thus giving a false impression of their rates. You'll also see loan companies showing a range of interest rates that are designed to show their lowest and highest rates. Companies are bound to show this range when they promote loans aimed at consolidating other debts. When a company shows a high top-end rate the customer could construe this as being a negative factor, when in fact it just means that the lender is more likely to be able to cater for a wider range of credit applications than a more restricted lender. All very confusing!

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.

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