Typical APR vs. Representative APR

industryinsider2

Official MoneySavingExpert.com insert

For full info on loans and their APRs, see the main website's representative APR for loans guide.

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Some of the new European Consumer Credit Directive (replacement for the Consumer Credit Act) regulations came into force today and over the course of the next month you will see credit adverts start to use a representative APR rather than a typical APR.

The main difference is that the measurement which credit providers use to calculate the figure will change from being based on the rate which 66% of customers who respond to an advert to just 51%.

Is this going to make things easier or harder to understand?
Did anyone even understand what a typical APR was in the first place?

Tixy

Is it not 66%/51% of those who are accepted - rather than those who respond to an advert?

A lot of people already understand how it works, and those that don't and come on the forum upset and posting that they haven't received that rate they expected will probably continue to do so. Maybe they'll notice the word representative more than typical and query it, but I doubt it.

A chap from my bank trying to sell me a consolidation loan last week didn't seem to understand what I meant when I asked if he was quoting the typical rate.

(There is an MSE discussion thread here as well - https://forums.moneysavingexpert.com/discussion/3021980)

industryinsider2

Tixy wrote: »

Is it not 66%/51% of those who are accepted - rather than those who respond to an advert?

Sorry, I didn't word that very well. It's the rate which 51% who respond to a particular advert could expect to receive if they get accepted. So from a credit card providers point of view, lets they are going to place an advert in the back of the FT. They would need to look at the advert which they placed in the FT last month, work out which customers responded to that ad, which ones were got a card and what rate 51% of their customer were given from a worst case scenario point of view.

Thanks for the link, I'll check out that other thread too.

Anyone else know/care what I'm talking about. I just think it's pathetic change which makes things even more confusing.

CLAPTON

Although it makes uk comsumer law a little worse, in general most people are simply concerned about whether they are offered a loan and if so at what rate.
The fact that a certain proportion of other people get a specific rate is probably not of major concern.
Overall though the other changes (like the overpayment directive) are good.

motoko

Of course people would rather know what rate they will get, instead of what rates other people have got. But when the interest rate is based on risk, they can't possibly know what rate they are going to get before applying, therefore the typical / representative rate is the only information available to help them decide whether they want to apply for the product. And since most people probably won't know how this typical / representative rate is calculated, I think its pretty important that its done in a way that will actually give people they information they think they are getting.

If you didn't know what the typical rate was, your first guess might well be that its the average rate for accepted applicants, since that would be an obvious way of working it out, but you would be completely wrong. In fact the majority of accepted applicants should expect to be given a higher rate, so its not really very typical is it? Rather its extremely misleading to anyone who doesn't know how its calculated, which lets face it, is probably most people.

At least with the new representative rate, around the same number of people should receive a lower rate as a higher rate. Its still not quite the same as the average, but it gives a much better idea of the usual rate offered.

Personally I'd rather see a average (mean) rate with some kind of error to indicate how wide the spread of rates was over all the accepted applicants. I.e. Average Rate = X ± Y %, where X is the average and Y is the standard deviation (or maybe 2 X the standard deviation which should cover the majority of the rates offered). Then if Bank A claimed an average rate of 15±1%, whereas Bank B said theirs was 15±5%, you could decide which one to go for based on whether you thought you were likely to get a better or worse than average credit score, and whether you thought it was worth the risk. I guess it might confuse some people, but maybe that's not such a bad thing. If they are confused because they don't what rate they are applying for, then they have a better understanding of the situation than before, when they thought they knew but were actually wrong.