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APR and Total Charge For Credit
simon_the_poet
Posts: 186 Forumite
Thought this may be useful for those interested in numbers
Fees Charges interest
and APR
A quick intro to the subject just skip the bits you already know.
Interest
Basic or flat rate annual interest is calculated using three basic values
1) Total Credit (the amount you borrow)
2) Interest
3) Repayment period
The sum of the first two is the Total Amount Payable (TAP)
So say you borrow £200 pounds over 24 months and the interest is 30% p/a
The interest on the credit would be £60 per year for two years or 2*60=£120
The TAP would be interest + total credit £320
The repayments would be 320/24 = £13.33 per month
APR
The flat rate interest can be used by the lender when comparing various loan options in order to get the best deal but it does not give the full picture it ignores two important points.
1) The repayment intervals
Say you borrow £100 with twelve monthly repayments at a flat annual rate of 6.5%.
This means your TAP is £106.5.
Now say you borrow the same amount £100 over twelve months but you repay the loan in one repayment on the last month of the term (ie one payment of £106.5)
The flat rate on both loans are the same but which gives the better deal?
Obviously the second because you have had the use of the money longer before you have to pay it back,
The APR takes account of this in the first instance the APR would be 12.68% and in the second a much more attractive 6.5% .
This is worth remembering when we talk about fees and charges that are paid in addition to the first or as an initial payment ,as we have seen an irregular payment especially at the beginning of the term can have a great effect on the APR
2) Fees Charges and Compulsory Insurances
The additions of fees charges or other items that must be taken out in order to get the loan will of course effect the desirability of the loan purchase and must be reflected in the APR.
This is done by directing the creditor to add any such sums to the interest creating a figure known as the :
Total charge for Credit
TOTAL CHARGE for CREDIT consists of any monies that you contractually agreed to pay in order to procure the loan. It Includes;
We have seen that that he interest rate is calculated using the total credit and the amount of interest .
The APR. is calculated by using the total credit and the (amount of interest + all the compulsory charges (or the TCC) ).
The Regulations and Total Charge for Credit
Section 9(4) of the Consumer Credit Act 1974 says
“For the purposes of this Act, an item entering into the total charge for credit shall not be treated as credit even though time is allowed for its payment.”
Section 20 enables the secretary of state to define “what items are to be treated as entering into the total charge for credit, and how their amount is to be ascertained;”.
This he does in the statutory instrument, Total Charge for Credit Regulations.
Correctly applying fees and charges to an agreement.
If a fee or charge falls into the category of a charge for credit as we have seen the regulations give instructions on how it should be added to the agreement this is not always as straight forward as it seems.
Say you buy a car for £2000 the interest is 40% which comes to £50 and the dealer wants to charge you a document fee of £20.
Total credit £2000
Total charge for credit made up of £50 interest + £20 fee
TAP £2070
The repayments on equal monthly payments would be 2070/12= £172.50
This is in accordance with the act as the fee is include within the TCC and as we saw earlier would give an accurate figure when the APR is calculated.
Now lets look at what sometimes happens if we apply this to a car loan and the salesman is not totally honest.
A)
A fee is charged at collection of the vehicle as well as being in the total charge for credit.
This is easily overlooked as the salesman usually says that you are simply paying of the fee up front and it will be knocked off your total, this is of course bull. As we see here it increase your TAP and ends up in the dealers pocket he then sends the unaltered agreement to the credit company and bobs your uncle.
Total credit £2000 +£20
Total charge for credit made up of £50 interest + £20 fee
TAP £290
The fee is added to the total credit
This breaches section 9(4) of the act because as you see it has caused the interest rate to increase and also the TAP which will also of course result in the repayments being increased.
This is not always easy to spot on the agreement, what usually happens is that the first payment is increased in order to pay the fee.
There is no way of getting around the illegality of this.
Total credit £2000 +£20
Total charge for credit made up of £50.5 interest
TAP £2070.5
C)
The fee is just for convenience being added to the initial payment, but is separate to the main agreement on which all the calculations for APR are correct.
This would mean that a compulsory fee was not being factored into the calculation for APR and it would be therefore inaccurate.
Note
It is not as easy as just saying that the creditor cannot add the fee to the first payment. He can but the fee must form part of the charge for credit and must have an effect on the APR.
The only way to check that he has complied is to do the maths and calculate the APR
1 With the fee included in the Total charge for credit.
2 With the fee included in the Total Credit
If the figure on the agreement agrees with 1 then the agreement is OK if it agrees with 2 then you have an improperly executed agreement.
(Remember that if the agreement has a larger initial payment your calculation will have to allow for an irregular first payment in order to give an accurate APR see ((1) The repayment intervals above.)
Simon
Fees Charges interest
and APRA quick intro to the subject just skip the bits you already know.
Interest
Basic or flat rate annual interest is calculated using three basic values
1) Total Credit (the amount you borrow)
2) Interest
3) Repayment period
The sum of the first two is the Total Amount Payable (TAP)
So say you borrow £200 pounds over 24 months and the interest is 30% p/a
The interest on the credit would be £60 per year for two years or 2*60=£120
The TAP would be interest + total credit £320
The repayments would be 320/24 = £13.33 per month
APR
The flat rate interest can be used by the lender when comparing various loan options in order to get the best deal but it does not give the full picture it ignores two important points.
1) The repayment intervals
Say you borrow £100 with twelve monthly repayments at a flat annual rate of 6.5%.
This means your TAP is £106.5.
Now say you borrow the same amount £100 over twelve months but you repay the loan in one repayment on the last month of the term (ie one payment of £106.5)
The flat rate on both loans are the same but which gives the better deal?
Obviously the second because you have had the use of the money longer before you have to pay it back,
The APR takes account of this in the first instance the APR would be 12.68% and in the second a much more attractive 6.5% .
This is worth remembering when we talk about fees and charges that are paid in addition to the first or as an initial payment ,as we have seen an irregular payment especially at the beginning of the term can have a great effect on the APR
2) Fees Charges and Compulsory Insurances
The additions of fees charges or other items that must be taken out in order to get the loan will of course effect the desirability of the loan purchase and must be reflected in the APR.
This is done by directing the creditor to add any such sums to the interest creating a figure known as the :
Total charge for Credit
TOTAL CHARGE for CREDIT consists of any monies that you contractually agreed to pay in order to procure the loan. It Includes;
- The interest charged on the loan
- Any setting up fees charged by the creditor
- Any insurance that was conditional on you getting the loan (if you didn’t buy they wouldn’t give you the loan)
- The final purchase element on a hire purchase agreement
- Any brokerage charges
- Any attached agreements necessary to the purchase of the loan
We have seen that that he interest rate is calculated using the total credit and the amount of interest .
The APR. is calculated by using the total credit and the (amount of interest + all the compulsory charges (or the TCC) ).
The Regulations and Total Charge for Credit
Section 9(4) of the Consumer Credit Act 1974 says
“For the purposes of this Act, an item entering into the total charge for credit shall not be treated as credit even though time is allowed for its payment.”
Section 20 enables the secretary of state to define “what items are to be treated as entering into the total charge for credit, and how their amount is to be ascertained;”.
This he does in the statutory instrument, Total Charge for Credit Regulations.
Correctly applying fees and charges to an agreement.
If a fee or charge falls into the category of a charge for credit as we have seen the regulations give instructions on how it should be added to the agreement this is not always as straight forward as it seems.
Say you buy a car for £2000 the interest is 40% which comes to £50 and the dealer wants to charge you a document fee of £20.
Total credit £2000
Total charge for credit made up of £50 interest + £20 fee
TAP £2070
The repayments on equal monthly payments would be 2070/12= £172.50
This is in accordance with the act as the fee is include within the TCC and as we saw earlier would give an accurate figure when the APR is calculated.
Now lets look at what sometimes happens if we apply this to a car loan and the salesman is not totally honest.
A)
A fee is charged at collection of the vehicle as well as being in the total charge for credit.
This is easily overlooked as the salesman usually says that you are simply paying of the fee up front and it will be knocked off your total, this is of course bull. As we see here it increase your TAP and ends up in the dealers pocket he then sends the unaltered agreement to the credit company and bobs your uncle.
Total credit £2000 +£20
Total charge for credit made up of £50 interest + £20 fee
TAP £290
The fee is added to the total credit
This breaches section 9(4) of the act because as you see it has caused the interest rate to increase and also the TAP which will also of course result in the repayments being increased.
This is not always easy to spot on the agreement, what usually happens is that the first payment is increased in order to pay the fee.
There is no way of getting around the illegality of this.
Total credit £2000 +£20
Total charge for credit made up of £50.5 interest
TAP £2070.5
C)
The fee is just for convenience being added to the initial payment, but is separate to the main agreement on which all the calculations for APR are correct.
This would mean that a compulsory fee was not being factored into the calculation for APR and it would be therefore inaccurate.
Note
It is not as easy as just saying that the creditor cannot add the fee to the first payment. He can but the fee must form part of the charge for credit and must have an effect on the APR.
The only way to check that he has complied is to do the maths and calculate the APR
1 With the fee included in the Total charge for credit.
2 With the fee included in the Total Credit
If the figure on the agreement agrees with 1 then the agreement is OK if it agrees with 2 then you have an improperly executed agreement.
(Remember that if the agreement has a larger initial payment your calculation will have to allow for an irregular first payment in order to give an accurate APR see ((1) The repayment intervals above.)
Simon
0
Comments
-
Hi Simon
A comprehensive post ... cue pedant but I hope I come across as constructive.
My only criticism is that encouraging people to calculate the APR is not necessarily realistic (is it?). I would imagine the calculation as laid out by the OFT is beyond the maths of 99% of people. It is simpler to write a computer program or an excel macro to handle it but that too is probably beyond the skills of many.
In addition, I don't think your average layman is going to be able to ascertain with certainty what types of charges and fees can be included or omitted from the calculation. That is not my area but I imagine there is plenty of scope for 'interpretation'.
I created a website which calculates APR but it is only intended for use by legal or financial specialists who understand the regulations.
Is that a fair assessment or am I just being an irritant?
Incidentally, how do you calculate the APR? Are you a maths genius, do you use a ready reckoner or do you have access to a tool?
Cheers0 -
Hi Simon
A comprehensive post ... cue pedant but I hope I come across as constructive.
My only criticism is that encouraging people to calculate the APR is not necessarily realistic (is it?). I would imagine the calculation as laid out by the OFT is beyond the maths of 99% of people. It is simpler to write a computer program or an excel macro to handle it but that too is probably beyond the skills of many.
In addition, I don't think your average layman is going to be able to ascertain with certainty what types of charges and fees can be included or omitted from the calculation. That is not my area but I imagine there is plenty of scope for 'interpretation'.
I created a website which calculates APR but it is only intended for use by legal or financial specialists who understand the regulations.
Is that a fair assessment or am I just being an irritant?
Incidentally, how do you calculate the APR? Are you a maths genius, do you use a ready reckoner or do you have access to a tool?
Cheers
HI
Hardly a maths genius.
I use a spreadsheet and adopt the formula in the TCC regs.
I use the go seek function to search the solution and input the various re-payments and intervals,
I prefer this to the IRR method mentioned in the OFT guide.
I realise that most people would probably not be able or even have the wish to calculate or check their APR my intention was more to stimulate an interest and perhaps make people more aware of what APR is.
Best Regards
Peter0 -
Unfortunately there are too many people who care solely about monthly payments, rather than interest rates (either flat or APR)
0 -
nomoneytoday wrote: »Unfortunately there are too many people who care solely about monthly payments, rather than interest rates (either flat or APR)
Hi
Yes unfortunately too true.
A few years ago I landed a job as development worker for our local credit union.
This was funded by a European grant and overseen by the local council. As part of my brief I attended a number of schools and neighbourhood meetings in order to raise awareness of APR and its value in assessing the value of the loan.
The area I live in is rife with doorstep lenders and loan sharks and this was I think a commendable attempt by the council to address the matter.
I found, strangely enough, that the younger members of my community were more receptive to the information.
Perhaps that is the way to go.
Simon0 -
Are you Simon, Peter or Mike??
http://www.legalbeagles.info/forums/showthread.php?t=23763
http://resolveforum.com/getting-loan-mortgage/73609-apr-total-charge-credit.html
http://www.consumeractiongroup.co.uk/forum/showthread.php?187938Beware of imitations e.g. Robert Sterling0 -
R0bert_Sterling wrote: »
Simon the poet
Peter the bard
Mike?i did recieve a request to use my post from resolve however it would have been nice to get an acknowledgement thanks for the heads up
.
Simon0
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