APR do you really understand it?
Discussion
sidicks said:
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 !!
IsaacNewton said:
APR isn't calculated using possible future changes to the loan, so the provider won't allow for them.
I know that, but no other metric will do that either - basically then you are simply claiming that is impossible to choose which loan is best value based on unknown future circumstance.I would agree with that!
IsaacNewton said:
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.
The relevant APR IS the individual's own IRR based on what they think they will do.sidicks said:
IsaacNewton said:
APR isn't calculated using possible future changes to the loan, so the provider won't allow for them.
I know that, but no other metric will do that either - basically then you are simply claiming that is impossible to choose which loan is best value based on unknown future circumstance.I would agree with that!
Future circumstances may be unknow to the loan provider who calculates the APR, but may be know to the individual who require the loan, and an informed and rational choice may be made by the individual which is not necessarily choosing the loan with the lowest APR.
sidicks said:
IsaacNewton said:
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.
The relevant APR IS the individual's own IRR based on what they think they will do.Calling an IRR calculated by an individual the APR is misleading given the context of this thread.
I think people are talking a little at cross purposes here and are disagreeing where there is no disagreement.
I THINK we all agree that APR is the only real way to do an accurate comparison between loans.
HOWEVER, if you are not going to follow the exact payment structure that the APR is calculated from, then it is up to the individual to work out the cheapest loan for them based on THEIR specific situation.
No published APR can do that.
Many people do not understand all this so if they deviate from the norm they are probably up the proverbial without a method of propulsion in trying to work our THEIR EAPR.
Seem about right?
I THINK we all agree that APR is the only real way to do an accurate comparison between loans.
HOWEVER, if you are not going to follow the exact payment structure that the APR is calculated from, then it is up to the individual to work out the cheapest loan for them based on THEIR specific situation.
No published APR can do that.
Many people do not understand all this so if they deviate from the norm they are probably up the proverbial without a method of propulsion in trying to work our THEIR EAPR.
Seem about right?
garyhun said:
I think people are talking a little at cross purposes here and are disagreeing where there is no disagreement.
I THINK we all agree that APR is the only real way to do an accurate comparison between loans.
HOWEVER, if you are not going to follow the exact payment structure that the APR is calculated from, then it is up to the individual to work out the cheapest loan for them based on THEIR specific situation.
No published APR can do that.
Many people do not understand all this so if they deviate from the norm they are probably up the proverbial without a method of propulsion in trying to work our THEIR EAPR.
Seem about right?
Not really. The thread was started by someone who thought APR was nonsense, told you nothing about how much the loan would cost and we were all being conned by APR rates. And a few others agreed.I THINK we all agree that APR is the only real way to do an accurate comparison between loans.
HOWEVER, if you are not going to follow the exact payment structure that the APR is calculated from, then it is up to the individual to work out the cheapest loan for them based on THEIR specific situation.
No published APR can do that.
Many people do not understand all this so if they deviate from the norm they are probably up the proverbial without a method of propulsion in trying to work our THEIR EAPR.
Seem about right?
Some people seem to think that the only thing that matters is the term of the loan and the amount of extra money you end up paying. They seem to think it's irrelevant if you pay it in equal monthly instalments, or all off in a lump sum at the end, or a combination of the two. Because they are idiots.
garyhun said:
HOWEVER, if you are not going to follow the exact payment structure that the APR is calculated from, then it is up to the individual to work out the cheapest loan for them based on THEIR specific situation.
It very common with mortgages to remortgage before the end of the original term of the loan.So using APR is the way to determine he cheapest loan, except when it doesn't work. And the main exception is for what will almost certainly be the largest loans that most people take out.
IsaacNewton said:
It very common with mortgages to remortgage before the end of the original term of the loan.
So using APR is the way to determine he cheapest loan, except when it doesn't work. And the main exception is for what will almost certainly be the largest loans that most people take out.
True, but how many people compare APRs on mortgage rates? Most people will compare intro rates as they know they are likely to remortgage. They should actually put more focus on the APR, and more importantly, what the reversionary is and how is is derived as borrowers can get and do get stuck with a lender (or maybe the lender is stuck with the borrower).So using APR is the way to determine he cheapest loan, except when it doesn't work. And the main exception is for what will almost certainly be the largest loans that most people take out.
CaptainSlow said:
IsaacNewton said:
It very common with mortgages to remortgage before the end of the original term of the loan.
So using APR is the way to determine he cheapest loan, except when it doesn't work. And the main exception is for what will almost certainly be the largest loans that most people take out.
True, but how many people compare APRs on mortgage rates? Most people will compare intro rates as they know they are likely to remortgage. They should actually put more focus on the APR, and more importantly, what the reversionary is and how is is derived as borrowers can get and do get stuck with a lender (or maybe the lender is stuck with the borrower).So using APR is the way to determine he cheapest loan, except when it doesn't work. And the main exception is for what will almost certainly be the largest loans that most people take out.
First you agree with me - APR isn't necessarily appropriate to compare mortgages. Then you say that people should put more focus on the APR. It seems like you're contradicting yourself...?
IsaacNewton said:
It very common with mortgages to remortgage before the end of the original term of the loan.
IMO the biggest mistake most people make with mortgages is to "fix" for an initial period of years. Yes, I realise it brings certainty, but what's the point of 4 years certainty on a 25 year loan? Especially as the rates are so much higher.It's often worth paying an arrangement fee to get a good initial variable rate. £250k at 1.8% over base for 25 years looked pretty darned good value to me with an arrangement fee of £2,000 at the start. Total repayments will be 300 months at (currently) £1,100 a month - in other words a total of £80,000 interest through the term. So that £2k fee is completely insignificant. And if rates rise, which they will, the fee just looks smaller and smaller.
If you fix for 4 years at a time through a 25 year loan then sooner or later you're going to nail yourself by fixing just before a significant fall in interest rates.
Edited by Claudia Skies on Tuesday 27th January 17:14
IsaacNewton said:
CaptainSlow said:
IsaacNewton said:
It very common with mortgages to remortgage before the end of the original term of the loan.
So using APR is the way to determine he cheapest loan, except when it doesn't work. And the main exception is for what will almost certainly be the largest loans that most people take out.
True, but how many people compare APRs on mortgage rates? Most people will compare intro rates as they know they are likely to remortgage. They should actually put more focus on the APR, and more importantly, what the reversionary is and how is is derived as borrowers can get and do get stuck with a lender (or maybe the lender is stuck with the borrower).So using APR is the way to determine he cheapest loan, except when it doesn't work. And the main exception is for what will almost certainly be the largest loans that most people take out.
First you agree with me - APR isn't necessarily appropriate to compare mortgages. Then you say that people should put more focus on the APR. It seems like you're contradicting yourself...?
CaptainSlow said:
IsaacNewton said:
CaptainSlow said:
IsaacNewton said:
It very common with mortgages to remortgage before the end of the original term of the loan.
So using APR is the way to determine he cheapest loan, except when it doesn't work. And the main exception is for what will almost certainly be the largest loans that most people take out.
True, but how many people compare APRs on mortgage rates? Most people will compare intro rates as they know they are likely to remortgage. They should actually put more focus on the APR, and more importantly, what the reversionary is and how is is derived as borrowers can get and do get stuck with a lender (or maybe the lender is stuck with the borrower).So using APR is the way to determine he cheapest loan, except when it doesn't work. And the main exception is for what will almost certainly be the largest loans that most people take out.
First you agree with me - APR isn't necessarily appropriate to compare mortgages. Then you say that people should put more focus on the APR. It seems like you're contradicting yourself...?
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