'The AER interest rate:a blunt, flaccid tool' blog discussion

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.
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  • I can see the point you are making but not sure this is a problem with AER itself which I think has been a force for good over the years. The real problem is the way rates are advertised without using AER so the real solution is to require all savings products to quote AER when you are signing up for them.

    Mike
  • JimmyTheWigJimmyTheWig Forumite
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    In your example you shouldn't quote AER for one but not the other.

    You could say in the second one that if you leave the money in the account for a whole year the AER would be x.
    But it's still pretty meaningless.

    The beauty of AER/APR is that it is a way of being able to compare like with like. But if on both of these products the idea is to ditch and switch then they cannot be compared like for like because they are different products. Someone who wants their savings in 12 months time isn't going to bother to ditch and switch after 9 months. But equally someone who wants their savings in 15 months time may d&s after 9 months but not after 12 months. All you can do is give the info and let people decide which is right for them.

    The only alternative would be to establish what the average (median, I think) length of time a reader holds a savings account for. Then give the AER for this time period. For example, if the average reader will keep an account for 5 years both of the options given would be beaten by a 2.5% account with no bonus.

    Are _you_ restricted by what you have to say? A loan company must give the APR, however meaningless. Do you have to do the same? (Does this depend on whether you offer a referal link or not?)
    Is there a rule for how long an AER should be given for? For example on a 25 year mortgage the APR given will be for 25 years (I believe).

    Basically, I think I'm saying that where the policy is to ditch and switch then AER and APR are meaningless.
  • DarkConvictDarkConvict Forumite
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    Dare i say it, i think bonuses should be scrapped, that alone side all the different accounts and then different issue's of accounts, its all done to serve the purpose of the bank. Get you in so they can profit off you and lock you in. The rates all drop at some point to a stupid level. Every 12 months i have to open new savings accounts and move the money over and close the old one. Sometimes even with the same bank, feels like the bank is making you waste effort.

    It would be better if APRs had to be published for what would be expected over 5 years. Obviously fixed bonds have to be as along as they are. But with a 6 month bonus, a current high earner of say 4%, for 6 months drops down to 3%, the after 5 years is probably in the 0.1-1% pile.
    Although no trees were harmed during the creation of this post, a large number of electrons were greatly inconvenienced.

    There are two ways of constructing a software design: One way is to make it so simple that there are obviously no deficiencies, and the other way is to make it so complicated that there are no obvious deficiencies
  • VT82VT82 Forumite
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    The APR on mortgages is even more meaningless.

    Why on Earth the powers that be feel the average interest rate over the life of the mortgage assuming:

    -the rate never changes on a tracker product for the time you are on the product (unlikely!)
    -the rate never changes on the SVR after the product expires for the whole rest of the mortgage (as if!)
    -everyone has the same term
    -everyone has a repayment mortgage (and the same repayment profile because the rates never change)
    -everyone has the same mortgage size

    could be useful, is anyone's guess!
  • dtaylor84dtaylor84 Forumite
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    What's wrong with quoting the AER of the West Bromich account as 3% AER until 31/03/2010, then 2% AER.

    Say there was no bonus rate. You'd say it was 3% AER (variable) - they can still cut the rate at the end of March.

    I don't see a problem, really. The AER is what you would get over a year, it doesn't mean the AER will apply for a whole year.
  • edited 25 June 2010 at 3:21PM
    peterbakerpeterbaker
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    edited 25 June 2010 at 3:21PM
    I think the problem is very much that banks' marketeers generally set out deliberately to use APR and AER to mislead in their marketing and design of products.

    As both DarkConvict and VT82 have said, the way APRs are commonly used to describe hybrid products with short period low starts/trackers/bonuses is utterly meaningless, and the banks know it.

    I think the banks should instead of being allowed to use the terms AER and APR in relation to such products, be forced to in every sale of such a product to declare instead, in dirty great black letters "Hybrid Banking Products Can Seriously Damage Your Wealth" and obtain the customer's signature to confirm that they have had a worked example explained to them and that they have understood a comparison with a level interest product where the AER/APR can be more simply comprehended. There should also be maths question that the customer must answer correctly unaided that is linked to the explained comparison.

    I think the banks might soon get tired of pulling the wool over customers eyes if they were forced to stop abusing APR/AER in this way.

    I would also stop credit card issuers from advertising 0% APR or 0% anything if there is a mandatory handling charge linked to the same transaction.

    In my view, the difficulty MSE Martin has highlighted arises solely out of the concious abuse and exploitation of the 'once upon a time' perfectly useful concepts of APR/AER by the banks.
  • JimmyTheWigJimmyTheWig Forumite
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    peterbaker wrote: »
    There should also be maths question that the customer must answer correctly unaided that is linked to the explained comparison.
    I love it!
    I think the banks might soon get tired of pulling the wool over customers eyes if they were forced to stop abusing APR/AER in this way.
    I'm not actually convinced that this is the case. Generally with a "hybrid" product there is an introductory period with a good rate followed by a lifetime or near-lifetime of a poorer rate. The banks want to highlight the short-term rate to attract customers but if anything an AER/APR forces them to highlight beyond this.
    I would also stop credit card issuers from advertising 0% APR or 0% anything if there is a mandatory handling charge linked to the same transaction.
    A case in point. They can't call this 0% APR.
    If you go to http://www.santander.co.uk/creditcards as an example you'll see various 0%s being mentioned but the APR figure, the only figure in bold, shows much higher percentages.
  • bigbloke45bigbloke45 Forumite
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    I don't think that AER is understood any more than APR. Both have been designed by actuaries who don't have enough to do any more.

    Why not just tell people how much interest they will get over the relevant periods in pounds?

    No wriggling then!

    How many actuaries does it take to count to three? Those that can count and those that can't. :eek:
  • dimbo61dimbo61 Forumite
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    In the 2 examples you gave you did not say what either savings rate reverts to after the 12 months so the savings rate could go down to NOTHING 0% after the first year!
    One year ISA,s tend to do this so savers end up on 0.1/0.25% rate
  • Jeffp1Jeffp1 Forumite
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    Martin,

    I have recently puchased the max index linked certificates in the belief that at the moment they will deliver 1% plus RPI ie around 6.1% tax free as is being stated by many including you!
    However,I have just been told by a financial adviser that this is not true and that the marketing for this is deceptive ! What you actually get is the DIFFERENCE between RPI when you buy them and the anniversary date +1%, so if inflation stays at 5.1% for next 12 months I will only get 1% !!!

    please confirm if this is correct as you have been quoting that you get 6.3% tax free, which does not appear to be the case. The Fin advisor said it does not clarify this on line and you need to read the printed literature from the PO. I welcome your comments and clarification.
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