APR do you really understand it?
Discussion
TheHound said:
I agree APR can be very misleading and don't think it is a good way to "sell" credit. Maybe its just because I'm good at numbers but I would much rather see the flat rate and work the costs out from that.
Absolutely. It amazes me that people will look at a loan over 5year borrowing £20000 and compare it with an APR for borrowing the same amount over ten years with a higher rate of interest and still believe they are getting a better deal.Shambler said:
Im amazed at the amount of people quoting APR when talking about loans. I generally think people don't have a clue and pay more attention to APR than to what amount they are paying back in interest. Do so many people not realise how misleading APR can be?
The APR measures the true cost of the loan (i.e. if you borrowed money and simply held it in a bank, it shows the interest rate that you'd need to earn on that money (after tax) to be able to repay the loan.)Of course over a short period it can distort the £ cost of a loan.
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Edited by sidicks on Saturday 24th January 12:34
IsaacNewton said:
How does the flat rate of a loan tell you what the costs are?
You can easily use the flat rate of a loan to tell you what the total interest paid is (and hence what the repayments would be) but it doesn't tell you anything about the true cost of the loan - particular for loans with uneven repayment periods (PCPs etc).sidicks said:
IsaacNewton said:
How does the flat rate of a loan tell you what the costs are?
You can easily use the flat rate of a loan to tell you what the total interest paid is (and hence what the repayments would be) but it doesn't tell you anything about the true cost of the loan - particular for loans with uneven repayment periods (PCPs etc).Yes.
But it don't tell you about any fees associated with the loan, so the poster above won't be able to calculate the cost of a loan just from the flat rate.
If I borrow £100 on 1 January for a year at a 20% flat rate, I know I'm going to pay back £120.
If I pay back the whole £120 in a lump sum on 31 December that's fine, but if I have to repay £10 a month on the 31st of each month, I'm still only paying £120, and that's still 20%, but obviously it's a far worse deal. That's why APR is important.
If I was paying £10/month, it's not the APR that's misleading, but the 20%.
If I pay back the whole £120 in a lump sum on 31 December that's fine, but if I have to repay £10 a month on the 31st of each month, I'm still only paying £120, and that's still 20%, but obviously it's a far worse deal. That's why APR is important.
If I was paying £10/month, it's not the APR that's misleading, but the 20%.
Edited by TwigtheWonderkid on Saturday 24th January 20:27
TwigtheWonderkid said:
If I borrow £100 on 1 January for a year at a 20% flat rate, I know I'm going to pay back £120.
If I pay back the whole £120 in a lump sum on 31 December that's fine, but if I have to repay £10 a month on the 31st of each month, I'm still only paying £120, and that's still 20%, but obviously it's a far worse deal. That's why APR is important.
If I was paying £10/month, it's not the APR that's misleading, but the 20%.
But the APR in this example is 35%, thats not an easy calcculation and doesn't really mean anything apart from a comparison against other APR figures. For most people quoting 35% APR is very confusing for basically working out that you would pay £20 intrest on the £100 quid loan . However saying a flat rate of 20% on £100 over the year, is therefore easy to work out the cost of finance is £20. If I pay back the whole £120 in a lump sum on 31 December that's fine, but if I have to repay £10 a month on the 31st of each month, I'm still only paying £120, and that's still 20%, but obviously it's a far worse deal. That's why APR is important.
If I was paying £10/month, it's not the APR that's misleading, but the 20%.
Edited by TwigtheWonderkid on Saturday 24th January 20:27
However, as has been said above you only really need to look at two things, how much you are going to borrow and the total cost of borrowing this amount. Surely that is the easiest and best way of finding the best finance option available
Edited by TheHound on Saturday 24th January 20:41
TheHound said:
However, as has been said above you only really need to look at two things, how much you are going to borrow and the total cost of borrowing this amount. Surely that is the easiest and best way of finding the best finance option available
No, you need to look at 3 things, how much you borrow, how much you pay back, and the method at which you pay it back (in a lump at the end, bit by bit throughout the loan period, or a mixture where you pay each month and a balloon payment at the end. Edited by TheHound on Saturday 24th January 20:41
TheHound said:
But the APR in this example is 35%, thats not an easy calcculation and doesn't really mean anything apart from a comparison against other APR figures.
Wrong!! It may not be an easy calculation (for most people), but it's an important one as it shows the true cost (interest rate) of the loan.TheHound said:
For most people quoting 35% APR is very confusing for basically working out that you would pay £20 intrest on the £100 quid loan . However saying a flat rate of 20% on £100 over the year, is therefore easy to work out the cost of finance is £20.
Easy to work out, but not meaningful as a means to assess whether the loan offers a good deal or not.TheHound said:
However, as has been said above you only really need to look at two things, how much you are going to borrow and the total cost of borrowing this amount. Surely that is the easiest and best way of finding the best finance option available
No! As explained above (and every time the topic comes up on this forum) - to understand the 'best value' finance option you need to work out the true cost of the loan i.e. the effective interest rate being charged, which is the APR.By failing to incorporate the timing of repayments into the calculation the flat rate calculation is fundamentally flawed.
Not sure which is more surprising - the fact that this topic keeps cropping up or the fact that people will respond to it while blatantly not understanding the issues!
Edited by sidicks on Sunday 25th January 08:39
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