APR do you really understand it?
Discussion
Xerstead said:
I'm don't claim to understand it, but I see the importance of the repayment plan and how it makes a difference.
Taking the £5000 loan, over 24 months, with £400 total interest:
1) Equal monthly payments: You're borrowing £5K (plus interest) for 24 months, ~£4792 (+interest) for 23 months, ~£4584 for 22 months...
2) Lump sum at the end: You're borrowing the full £5000 for the full 24months.
3) £5300 paid at month 1, £100 in month 24: You're borrowing £4900 for one month, and £100 for 24 months.
Clearly option 2 gives you more of the bank's money for longer, for the same total cost as the others.
Option 3 still requires you to pay £400 in interest after paying most of the money back after one month.
Would I be right in saying that option 2 would have a lower APR, as more money is borrowed for longer (not yet paid pack) for the same cost?
and option 3 would have a much higher APR?
I hope I've got this right
Taking the £5000 loan, over 24 months, with £400 total interest:
1) Equal monthly payments: You're borrowing £5K (plus interest) for 24 months, ~£4792 (+interest) for 23 months, ~£4584 for 22 months...
2) Lump sum at the end: You're borrowing the full £5000 for the full 24months.
3) £5300 paid at month 1, £100 in month 24: You're borrowing £4900 for one month, and £100 for 24 months.
Clearly option 2 gives you more of the bank's money for longer, for the same total cost as the others.
Option 3 still requires you to pay £400 in interest after paying most of the money back after one month.
Would I be right in saying that option 2 would have a lower APR, as more money is borrowed for longer (not yet paid pack) for the same cost?
and option 3 would have a much higher APR?
I hope I've got this right
This thread is a perfect example of why the general public are screwing up the Financial Services industry.
The nannying that has been introduced has reduced the product choices down to the lowest denominator. Can't get an interest only mortgage? That's because of the morons "Oh I didn't realise I had to pay back the capital at the end"
The nannying that has been introduced has reduced the product choices down to the lowest denominator. Can't get an interest only mortgage? That's because of the morons "Oh I didn't realise I had to pay back the capital at the end"
CaptainSlow said:
This thread is a perfect example of why the general public are screwing up the Financial Services industry.
The nannying that has been introduced has reduced the product choices down to the lowest denominator. Can't get an interest only mortgage? That's because of the morons "Oh I didn't realise I had to pay back the capital at the end"
I think that's a bit unfair!The nannying that has been introduced has reduced the product choices down to the lowest denominator. Can't get an interest only mortgage? That's because of the morons "Oh I didn't realise I had to pay back the capital at the end"
I'd say it was a combination of:
- the general public not generally understanding things (but not wishing to pay for advice)
- advisors not always providing best advice
- product providers hiding the cost of advice (for the reasons above)
- a failure of the public to recognise the uncertainty in many financial products (and a failure for advisors and product providers to explain the uncertainty)
Etc
So let me understand, what exactly is wrong with APR?
Surely it lets people measure one loan against another in much the same way that people compare mpg of different cars? You might not be exactly on the figures but at least you know which is the cheapest and which is the most expensive over the term.
In my experience most critics of APR either,
Surely it lets people measure one loan against another in much the same way that people compare mpg of different cars? You might not be exactly on the figures but at least you know which is the cheapest and which is the most expensive over the term.
In my experience most critics of APR either,
- Don't understand money at all, or
- Have a vested interest in criticising APR.
Like I said earlier I think the true criticism of APR lies in the surprise number of people that don't grasp percentages.
Ask 100 people in the street what 2% of £25,000 is and you'd be surpised how many stare blankly back at you. So, whilst APR is pretty effective in what it does it doesn't help those who arguably need it most.
More dumming down required I'm afraid....
Ask 100 people in the street what 2% of £25,000 is and you'd be surpised how many stare blankly back at you. So, whilst APR is pretty effective in what it does it doesn't help those who arguably need it most.
More dumming down required I'm afraid....
DoubleSix said:
Like I said earlier I think the true criticism of APR lies in the surprise number of people that don't grasp percentages.
Ask 100 people in the street what 2% of £25,000 is and you'd be surpised how many stare blankly back at you. So, whilst APR is pretty effective in what it does it doesn't help those who arguably need it most.
More dumming down required I'm afraid....
If you are comparing two loans then 'you' don't need to understand what APR means to be able to choose the loan with the lower APR number...Ask 100 people in the street what 2% of £25,000 is and you'd be surpised how many stare blankly back at you. So, whilst APR is pretty effective in what it does it doesn't help those who arguably need it most.
More dumming down required I'm afraid....
And if 'you' can't look at two numbers and understand which is the lower number then I'm not sure there is much more 'dumming down' that can be done...!
sidicks said:
I
And if you can't look at two numbers and understand which is the lower number then I'm not sure there is much more 'dumming down' that can be done...!
It's not always so simple...DoubleSix said:
Like I said earlier I think the true criticism of APR lies in the surprise number of people that don't grasp percentages.
Ask 100 people in the street what 2% of £25,000 is and you'd be surpised how many stare blankly back at you. So, whilst APR is pretty effective in what it does it doesn't help those who arguably need it most.
More dumming down required I'm afraid....
If you are comparing two loans then you don't need to understand what APR means to be able to choose the loan with the lower APR number...Ask 100 people in the street what 2% of £25,000 is and you'd be surpised how many stare blankly back at you. So, whilst APR is pretty effective in what it does it doesn't help those who arguably need it most.
More dumming down required I'm afraid....
And if you can't look at two numbers and understand which is the lower number then I'm not sure there is much more 'dumming down' that can be done...!
APR assumes that the loan is repaid as agreed when it was originally taken out. For a mortgage where there is often a discounted or fixed rate for an initial period and where many policyholder will remortgage with the same or another provider) after this initial period has finished, the loan with the lowest APR figure may not be the "cheapest" option.
IsaacNewton said:
It's not always so simple...
APR assumes that the loan is repaid as agreed when it was originally taken out. For a mortgage where there is often a discounted or fixed rate for an initial period and where many policyholder will remortgage with the same or another provider) after this initial period has finished, the loan with the lowest APR figure may not be the "cheapest" option.
It is impossible to assess what the cheapest loan would be if you have to account for future (unknown) changes....APR assumes that the loan is repaid as agreed when it was originally taken out. For a mortgage where there is often a discounted or fixed rate for an initial period and where many policyholder will remortgage with the same or another provider) after this initial period has finished, the loan with the lowest APR figure may not be the "cheapest" option.
Claudia Skies said:
So let me understand, what exactly is wrong with APR?
Surely it lets people measure one loan against another in much the same way that people compare mpg of different cars? You might not be exactly on the figures but at least you know which is the cheapest and which is the most expensive over the term.
In my experience most critics of APR either,
Absolutely agree, but we have to accept that most people don't get percentages, and certainly they don't get compound interest and a.p.r. Surely it lets people measure one loan against another in much the same way that people compare mpg of different cars? You might not be exactly on the figures but at least you know which is the cheapest and which is the most expensive over the term.
In my experience most critics of APR either,
- Don't understand money at all, or
- Have a vested interest in criticising APR.
I've invented an alternative to interest rates to describe loans, which I've called Rule 72. Explained below, feel free to mock.
Pay day loans (borrow £100 on 20th to tide you over until you get paid on 30th, then pay back £120). Or short terms loans to get people thru Xmas. The APR on these loans is simply staggering, 1000s of %. Of course, the people they are aimed at are the poorest and often the most badly educated, so they don't understand APR or percentage in general. Even some people who are quite numerate struggle with APR and percentages.
For people who aren't numerate, borrowing £100 and paying £120 ten days later sounds ok. 20% rate. Of course it's not 20% at all, more like 5000% in APR terms.
So I think it's time we did away with APR and such, and made it law that all loans should be quoted on a time basis, using Rule 72.
72 is a kind of magical number in the world of compound interest. If you borrow £5k to buy a car, and the interest rate is 12% per year compound, if you divide the interest rate (12) into 72, it gives you 6. Coincidentally, if you never made any payments on the £5K/12% loan, the amount you owned would double in 6 yrs. So that loan, instead of being quoted at 12%, would be quoted as a Rule 72 six year loan.
Every loan firm would have to quote the Rule 72 time, the time it takes your loan to double if unpaid. Then even customers who were useless with figures would know that the longer the time, the better the loan. A loan that doubles in 7 yrs is better than a loan that doubles in 6.
Take my original payday loan. 20% interest for 10 days. Divide 20 into 72 gives you 3.6. Then multiply the 10 days by 3.6 to give 36 days. So that would be a Rule 72 36 day loan. The £100 you borrowed would turn into £200 owed in 36 days. And £400 36 days after that.
Anyone can see that a Rule 72 36 day loan is terrible compared to a Rule 72 6 year loan, which is what they might be offered on a personal car finance plan.
A mortgage might have an annual rate of 3.25% for example. 72 divided by 3.25 is 22.15. So a mortgage for £150K at 3.25% per annum would double to £300K in 22.15 years, if you never made any payments.
That's my theory. Hope I've explained it properly. No more apr or % rate. Just Rule 72 time period. It works in reverse too.
If you have money to invest, and someone was offering 6% per year, they wouldn't quote 6% under my system, they'd say our Rule 72 time is 12 years. If you invest your money with us, it'll take you 12 yrs to double your money if you don't touch it. Because paying 6%, you have to multiply that by 12 to get 72. Try it on a calculator with 100, and add 6% 12 times, and it comes to £201.21. The rule works, within a couple of quid either way, for any amount, over any period.
Xerstead said:
I'm don't claim to understand it, but I see the importance of the repayment plan and how it makes a difference.
Taking the £5000 loan, over 24 months, with £400 total interest:
1) Equal monthly payments: You're borrowing £5K (plus interest) for 24 months, ~£4792 (+interest) for 23 months, ~£4584 for 22 months...
2) Lump sum at the end: You're borrowing the full £5000 for the full 24months.
3) £5300 paid at month 1, £100 in month 24: You're borrowing £4900 for one month, and £100 for 24 months.
Clearly option 2 gives you more of the bank's money for longer, for the same total cost as the others.
Option 3 still requires you to pay £400 in interest after paying most of the money back after one month.
Would I be right in saying that option 2 would have a lower APR, as more money is borrowed for longer (not yet paid pack) for the same cost?
and option 3 would have a much higher APR?
I hope I've got this right
Not only have you got it right, but that knowledge probably puts you in the top 1% of the British public when it comes to understanding high finance!!! You are in an elite club!Taking the £5000 loan, over 24 months, with £400 total interest:
1) Equal monthly payments: You're borrowing £5K (plus interest) for 24 months, ~£4792 (+interest) for 23 months, ~£4584 for 22 months...
2) Lump sum at the end: You're borrowing the full £5000 for the full 24months.
3) £5300 paid at month 1, £100 in month 24: You're borrowing £4900 for one month, and £100 for 24 months.
Clearly option 2 gives you more of the bank's money for longer, for the same total cost as the others.
Option 3 still requires you to pay £400 in interest after paying most of the money back after one month.
Would I be right in saying that option 2 would have a lower APR, as more money is borrowed for longer (not yet paid pack) for the same cost?
and option 3 would have a much higher APR?
I hope I've got this right
TwigtheWonderkid said:
Absolutely agree, but we have to accept that most people don't get percentages, and certainly they don't get compound interest and a.p.r.
I've invented an alternative to interest rates to describe loans, which I've called Rule 72. Explained below, feel free to mock.
Pay day loans (borrow £100 on 20th to tide you over until you get paid on 30th, then pay back £120). Or short terms loans to get people thru Xmas. The APR on these loans is simply staggering, 1000s of %. Of course, the people they are aimed at are the poorest and often the most badly educated, so they don't understand APR or percentage in general. Even some people who are quite numerate struggle with APR and percentages.
For people who aren't numerate, borrowing £100 and paying £120 ten days later sounds ok. 20% rate. Of course it's not 20% at all, more like 5000% in APR terms.
So I think it's time we did away with APR and such, and made it law that all loans should be quoted on a time basis, using Rule 72.
72 is a kind of magical number in the world of compound interest. If you borrow £5k to buy a car, and the interest rate is 12% per year compound, if you divide the interest rate (12) into 72, it gives you 6. Coincidentally, if you never made any payments on the £5K/12% loan, the amount you owned would double in 6 yrs. So that loan, instead of being quoted at 12%, would be quoted as a Rule 72 six year loan.
Every loan firm would have to quote the Rule 72 time, the time it takes your loan to double if unpaid. Then even customers who were useless with figures would know that the longer the time, the better the loan. A loan that doubles in 7 yrs is better than a loan that doubles in 6.
Take my original payday loan. 20% interest for 10 days. Divide 20 into 72 gives you 3.6. Then multiply the 10 days by 3.6 to give 36 days. So that would be a Rule 72 36 day loan. The £100 you borrowed would turn into £200 owed in 36 days. And £400 36 days after that.
Anyone can see that a Rule 72 36 day loan is terrible compared to a Rule 72 6 year loan, which is what they might be offered on a personal car finance plan.
A mortgage might have an annual rate of 3.25% for example. 72 divided by 3.25 is 22.15. So a mortgage for £150K at 3.25% per annum would double to £300K in 22.15 years, if you never made any payments.
That's my theory. Hope I've explained it properly. No more apr or % rate. Just Rule 72 time period. It works in reverse too.
If you have money to invest, and someone was offering 6% per year, they wouldn't quote 6% under my system, they'd say our Rule 72 time is 12 years. If you invest your money with us, it'll take you 12 yrs to double your money if you don't touch it. Because paying 6%, you have to multiply that by 12 to get 72. Try it on a calculator with 100, and add 6% 12 times, and it comes to £201.21. The rule works, within a couple of quid either way, for any amount, over any period.
An interesting idea!I've invented an alternative to interest rates to describe loans, which I've called Rule 72. Explained below, feel free to mock.
Pay day loans (borrow £100 on 20th to tide you over until you get paid on 30th, then pay back £120). Or short terms loans to get people thru Xmas. The APR on these loans is simply staggering, 1000s of %. Of course, the people they are aimed at are the poorest and often the most badly educated, so they don't understand APR or percentage in general. Even some people who are quite numerate struggle with APR and percentages.
For people who aren't numerate, borrowing £100 and paying £120 ten days later sounds ok. 20% rate. Of course it's not 20% at all, more like 5000% in APR terms.
So I think it's time we did away with APR and such, and made it law that all loans should be quoted on a time basis, using Rule 72.
72 is a kind of magical number in the world of compound interest. If you borrow £5k to buy a car, and the interest rate is 12% per year compound, if you divide the interest rate (12) into 72, it gives you 6. Coincidentally, if you never made any payments on the £5K/12% loan, the amount you owned would double in 6 yrs. So that loan, instead of being quoted at 12%, would be quoted as a Rule 72 six year loan.
Every loan firm would have to quote the Rule 72 time, the time it takes your loan to double if unpaid. Then even customers who were useless with figures would know that the longer the time, the better the loan. A loan that doubles in 7 yrs is better than a loan that doubles in 6.
Take my original payday loan. 20% interest for 10 days. Divide 20 into 72 gives you 3.6. Then multiply the 10 days by 3.6 to give 36 days. So that would be a Rule 72 36 day loan. The £100 you borrowed would turn into £200 owed in 36 days. And £400 36 days after that.
Anyone can see that a Rule 72 36 day loan is terrible compared to a Rule 72 6 year loan, which is what they might be offered on a personal car finance plan.
A mortgage might have an annual rate of 3.25% for example. 72 divided by 3.25 is 22.15. So a mortgage for £150K at 3.25% per annum would double to £300K in 22.15 years, if you never made any payments.
That's my theory. Hope I've explained it properly. No more apr or % rate. Just Rule 72 time period. It works in reverse too.
If you have money to invest, and someone was offering 6% per year, they wouldn't quote 6% under my system, they'd say our Rule 72 time is 12 years. If you invest your money with us, it'll take you 12 yrs to double your money if you don't touch it. Because paying 6%, you have to multiply that by 12 to get 72. Try it on a calculator with 100, and add 6% 12 times, and it comes to £201.21. The rule works, within a couple of quid either way, for any amount, over any period.
Personally, I prefer the more accurate Rule 69.3 !!
TwigtheWonderkid said:
Pay day loans (borrow £100 on 20th to tide you over until you get paid on 30th, then pay back £120). Or short terms loans to get people thru Xmas. The APR on these loans is simply staggering, 1000s of %. Of course, the people they are aimed at are the poorest and often the most badly educated, so they don't understand APR or percentage in general. Even some people who are quite numerate struggle with APR and percentages.
In some circumstances paying £20 to have £100 tend days earlier can be a perfectly rational decision. The fact that it's far higher APR than a three year finance deal involving thousands is comparing apples and oranges. You might as well complain that the cost per mile of a minicab to the airport is far higher than that of the airfare to Sydney.
Dr Jekyll said:
TwigtheWonderkid said:
Pay day loans (borrow £100 on 20th to tide you over until you get paid on 30th, then pay back £120). Or short terms loans to get people thru Xmas. The APR on these loans is simply staggering, 1000s of %. Of course, the people they are aimed at are the poorest and often the most badly educated, so they don't understand APR or percentage in general. Even some people who are quite numerate struggle with APR and percentages.
In some circumstances paying £20 to have £100 tend days earlier can be a perfectly rational decision. The fact that it's far higher APR than a three year finance deal involving thousands is comparing apples and oranges. You might as well complain that the cost per mile of a minicab to the airport is far higher than that of the airfare to Sydney.
As I always say, you can divide the British public into three groups, those who can count and those who can't.
Dr Jekyll said:
In some circumstances paying £20 to have £100 tend days earlier can be a perfectly rational decision.
The fact that it's far higher APR than a three year finance deal involving thousands is comparing apples and oranges. You might as well complain that the cost per mile of a minicab to the airport is far higher than that of the airfare to Sydney.
We've already covered the fact that using APR for (very) short term loans doesn't make sense!The fact that it's far higher APR than a three year finance deal involving thousands is comparing apples and oranges. You might as well complain that the cost per mile of a minicab to the airport is far higher than that of the airfare to Sydney.
sidicks said:
We've already covered the fact that using APR for (very) short term loans doesn't make sense!
But using Rule 72 does. Surely even the thickest borrower can understand that a Rule 72 30 day is worse than a Rule 72 35 day. The first loan will double after 30 days if unpaid, but the second won't double until 35 days if unpaid. So they can compare all the payday loans available and choose the best one.sidicks said:
IsaacNewton said:
It's not always so simple...
APR assumes that the loan is repaid as agreed when it was originally taken out. For a mortgage where there is often a discounted or fixed rate for an initial period and where many policyholder will remortgage with the same or another provider) after this initial period has finished, the loan with the lowest APR figure may not be the "cheapest" option.
It is impossible to assess what the cheapest loan would be if you have to account for future (unknown) changes....APR assumes that the loan is repaid as agreed when it was originally taken out. For a mortgage where there is often a discounted or fixed rate for an initial period and where many policyholder will remortgage with the same or another provider) after this initial period has finished, the loan with the lowest APR figure may not be the "cheapest" option.
However the individual taking out the loan may well know of future intended changes, particularly with a mortgage with an idiscounted of fixed rate for an initial period. Hence the APR is not necessarily a useful measure of the cost of the loan, especially in the circumstances I mention above.
IsaacNewton said:
The APR calculation doesn't account for future changes.
That's my point - no comparison metric can take into account unknown future changes.IsaacNewton said:
However the individual taking out the loan may well know of future intended changes, particularly with a mortgage with an idiscounted of fixed rate for an initial period. Hence the APR is not necessarily a useful measure of the cost of the loan, especially in the circumstances I mention above.
If you know of future changes you can incorpoarte that into the APR calculation...Dr Jekyll said:
Part of the reason payday loans are expensive is due to an admin charge. If you compare 2 loans, one with a large admin charge and the other has none but higher interest costing slightly less if repaid on time. Won't the 72 rule make the second one look a worse deal?
That's true. Punters would have to compare the loan value set against admin fees. Which is probably asking a lot from your average pay day loan applicant!!! sidicks said:
IsaacNewton said:
The APR calculation doesn't account for future changes.
That's my point - no comparison metric can take into account unknown future changes.APR has its limitations - a loan with a higher APR can be cheaper.
sidicks said:
IsaacNewton said:
However the individual taking out the loan may well know of future intended changes, particularly with a mortgage with an idiscounted of fixed rate for an initial period. Hence the APR is not necessarily a useful measure of the cost of the loan, especially in the circumstances I mention above.
If you know of future changes you can incorpoarte that into the APR calculation...It's up to the individual to determine their own IRR and/or cashflow projection based on what they think they will do, and go from there irrespective of the APR.
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