# the value of apr.



## darag (24 Mar 2004)

apr has come in for a bit of a bashing from some in the credit union thread.  it seems people don't appreciate how fundamental apr is in determining value.

for example, someone suggested you just look at the size of the repayments to appreciate the value on offer.  this is like comparing the cost of a bag a spuds without looking at the weight.  yes a bag may cost 2.50 in spar versus 4 in dunne's but that tells you nothing about the relative value; the one in dunne's could be twice the size of the one in spar.  this is why supermarkets seem to be obliged (i believe) to quote cost per kilo or per liter for many food stuffs.

with loans there are a lot more variables than just weight to consider but basically apr does for loans what cost per kilo does for kerr pinks.  the variables to consider with loans include: the amount borrowed, the number of repayments, the size of the repayments and the amount of the final ("balloon") payment if any.  there is a well known formula in finance which reduces all of these factors down to a single figure called the "rate" which still depends on the term (length of time) of the loan.  the "apr" figure is an annualised version of this rate figure which factors in how long the loan runs for.

obviously given two loans, if the borrowed amount is the same and the repayment schedule is the same then comparing the size of the repayments will tell you which offers the best value.  however, just like when you are looking at two different sized packs of sausages wondering which is better value, often you don't have the exact same conditions attached to two different loans which makes it difficult to work out which is the best value.  however given the price per kilo, you can immediately figure out which is better value.

in the credit union thread, crugers gave an example where the same apr and the same loan amount and repayment schedule led to different monthly repayments.  however i am unable to make sense of any of the figures in that message; i started by just looking at the aib figure of 229.63 per month for 60 months - this gives a total amount of repayments of 13777 which doesn't tally with his later figures. i gave up at this stage.  basically i don't buy his claims that apr calculations are not an exact science.

on advantage of apr over cost per kilo for spuds is that you don't even have to worry whether the potatoes are muddy or bruised or half sprouting.  one bank's hundred quid is as goods as another's.


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## Brendan Burgess (25 Mar 2004)

Hi darag

A good posting on the advantages of APR. 

One other important advantage which few people consider, is that APR allows you to calculate the interest you are paying which is the real ongoing cost of the loan. 

If someone borrows €100k @ 3.5%, the real cost of servicing that loan is €3,500. 

If the annual repayments are €6,000, most people think that the cost is €6,000. But the real cost is €3,500 and the difference of €2,500 is capital repayment and the equivalent of savings. 

But people comparing the cost of buying vs renting often compare the rent to the repayments. This would be correct if it was an interest-only loan, but it's not correct for repayment mortgages.

Loan consolidation companies will abuse this.  "We will consolidate all your loans and reduce your repayments from €2,000 a month to €1,000 a month". People jump at this, not realising that the term is being extended from 3 years to 20 years.  They do not realise that the APR is going from 10% to 17%. 

There are problems with APR, but they are tiny compared to the abuse of other methods of comparison.

Brendan


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## Slim (25 Mar 2004)

Well, well, well!

I see we have two of the prominent figures from the CU thread combining for bit of an APR fest! - darag who rolled the CU ball and hopped it and then stood back and Brendan who chooses to use langauge more befitting back street money lenders to describe the actions of CUs.

Darag - your comment 





> this is like comparing the cost of a bag a spuds without looking at the weight. yes a bag may cost 2.50 in spar versus 4 in dunne's but that tells you nothing about the relative value; the one in dunne's could be twice the size of the one in spar


 is patronising in the extreme. No one who is casting doubts on the usefulness of APR is suggesting that we use different criteria to measure the APR. If a consistent formula was available to take into account all the various factors I would definitely agree that APR would be useful.

Seasoned financial journalists often say to ignore the quoted APR, look at how much it costs per month (obviously, for the same amount of loan).

Slim 8)


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## <A HREF=http://pub145.ezboard.com/baskaboutmoney.s (25 Mar 2004)

I don't think that darag's spuds metaphor is patronising at all. Simple metaphors like this are very useful for forcing home some otherwise arcane abstract technical financial point to people who are not familiar with the terminology. 

I've sort of lost track of the main criticisms or alleged flaws with APR as a criterion on which to evaluate the cost of credit but surely the fact that it is generally accepted worldwide as the best measure of same is significant?


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## daltonr (25 Mar 2004)

> Seasoned financial journalists often say to ignore the quoted APR



Which seasoned journalists?  I can't imagine a financial journalist lasting long enough to be seasoned if they go around giving out this kind of advice.

-Rd


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## car (25 Mar 2004)

*analogy*

to slim, 
Im gonna back up O here, I read the entire CU thread and at times got lost because I dont have a firm grasp of  some of the money language being talked.  I personally love the "bag of spuds" type analogys as I can the put the explanations into perspective.  It unmuddied the financial waters so to speak.

Im sure unmuddied is a word.


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## oysterman (26 Mar 2004)

*Re: analogy*

No it's not.

The word you're looking for is "demuddiffied".


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## <A HREF=http://pub145.ezboard.com/baskaboutmoney.s (26 Mar 2004)

*Re: analogy*

Demuddified is indeed the cromulent word in this context.

www.urbandictionary.com/d...=Cromulent


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## crugers (26 Mar 2004)

*value of apr*

Hi Darag!
Sorry you couldn't follow my logic over in the other thread. I'll try to make this post simple.
AIB online quote for a €10k loan:
60 monthly repayments of €229.63.
They say the APR for that loan is 9.80%
BOI online quote for a €10k loan:
60 monthly repayments of €236.46.
They say the APR for that loan is 9.80%

You correctly multiplied 60 x €229.63 for AIB and found that you will have repaid €13,777.80.

Now the tricky bit!

Multiply 60 x €236.46 for BOI! (hint! it starts with 14187 and ends with.60)
I think you will find that AIB's 9.80% APR is better value than BOI's 9.80% APR by €409.80.

Brendan says its just rounding errors but you would get a lot of Kerr Pinks for €409.80. 

QUESTION: When does 9.80% APR not equal 9.80% APR?


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## Brendan Burgess (26 Mar 2004)

*Re: value of apr*

crugers

Great post! Not easy to answer.

A 4% difference over 5 years between APRs is too much. Even if it that works out at less than 1% a year. I don't think that rounding can account for that. I suspect that one of the calculations is incorrect. I might take a day off and try to figure out the formula used in the Consumer Credit Act to see if AIB or Bank of Ireland is doing it incorrectly. 

I emailed my credit union and asked for a written explanation of how they calculate interest. They emailed me back and asked me to ring them and they would explain it to me over the phone. I replied that I wanted a written explanation,so I will wait until I get that.

So it seems as if the Credit Unions aren't great at formulae either. And I will guarantee you one thing, it won't make any allowances for the shareholding required to be left on deposit to secure my loan. 

Can we agree on anything?
When looking for a loan, ask the potential lenders what the APR is? 
If it's a credit union, ask them what deposit is required?
If any institution's APR is more than 1% higher, reject it.
If two institutions are within 1%, compare the repayments for the same amount and for the same period. 
Finally, check if there are any other additional benefits, such as free insurance.

Now I am off for a pint and a bag of crisps. It must be all that talk of Kerrs Pinks, which I thought was a type of pig.

Brendan


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## <A HREF=http://pub145.ezboard.com/baskaboutmoney.s (26 Mar 2004)

*Re: value of apr*



> It must be all that talk of Kerrs Pinks, which I thought was a type of pig.



I thought it was an Irish version of the Busby Babes! 

(That one should really confuse Brendan!) :lol


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## darag (26 Mar 2004)

*Re: value of apr*

slim, i'm not trying to patronise anyone. i just wanted to explain why it is unfair to claim that apr is just some sort of fictional statistic invented to heckle credit union advocates.  also, i've already explained why i wanted to avoid getting into the pros and cons of credit unions lending.  you may not believe this but i'm actually interested in working out a formula for the apr associated with credit union loans purely as an intellectual exercise.  ignore the banks v. credit unions thing for a moment and imagine that, for example, you and your spouse were both members of different credit unions and between you needed six grand to buy a car; your union offered you eight grand at a rate of 8% if you put two on deposit earning 2% while your spouse was offered nine grand at a rate of 7% but had to keep three on deposit earning 2.5%.  which would you go for?  is it heretical to talk of putting these numbers into a formula to work out which offers the best value?

crugers, thanks for trying to simplify things for me but i'm still confused.  in your original post you claimed the total cost of the aib loan was 2,504 when the total repayments on the 10k was 13,777.80.  where did this 2,504 figure come from?  i actually put your figures into a calculator and 229.63 a month for 60 months for 10k works out at about 14.25% apr.  to be generous to you, the aib online calculator may have a serious bug which has escaped their attention.  if i were cynical, i'd say you're just bandying about figures hoping nobody will actually check them.  by my calculations the repayments at 9.8% apr should be 209.50 or thereabouts per month.  if aib is quoting an apr of 9.8% but demanding 229.63 a month, then they have a serious case to answer for to the authorities and to satisfy you i'll make it my business to raise it as an issue to the asai.  could you give us a reference for your figures?


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## Statler (26 Mar 2004)

*Re: value of apr*

Just to clarify on the figures.
10k over 60 months:
AIBs online calculator quotes €208.40 per month before payment protection, which I believe is included in crugers figure? APR 9.8% Interest is indeed €2,504.


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## Slim (26 Mar 2004)

*Re: value of apr*

darag

I accept your bonafides and Brendan's without reservation. Perhaps I am being too sensitive. However, I feel that someone has to stand up for CUs in this forum. That is not to say that I would defend any practice which is misleading.

I would welcome a formula which would be flexible to cope with the variations which surface when you have >530 diff. organisations doing their own thing.

I think there are perceptions abounding which may need to be shattered or modernised.

I have a loan of over 20k from my CU. I had at one time a share balance of 5k which was frozen. I considered moving to a loan of 15k with a bank. However, I prefer the flexibility of paying in each month as and when it suits me, i.e. no direct debit hitting my bank acc. on a fixed date, very unforgiving. I find some comfort knowing that I have that 5k there if I need it and I arrange with the CU to reduce the balance.

Slim 8)


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## crugers (27 Mar 2004)

*Re:Re: value of apr*

Hi darag
I would welcome a world standard formula for APR that could be relied upon. I would be slow to recommend as difinitive, what we have at present. A good pointer, maybe, but with conditions attached.
The spud is as you said is sold in kilo's. The kilo is presently defined, I think, by reference to a cylinder of platinum and iridium, held by the International Committee on Weights and Measures in a heavily guarded chateau outside Paris, in ideal athmospheric conditions and very limited access. They also hold the "Standard Metre".(I'm open to correction on both these "facts"... ). The Irish State have their "Standard Kilo" which is calibrated by reference to the Paris one. In turn retail scales should be calibrated by reference to the Irish Standard kilo. Hence we can have confidence that our kilo is the same as a French kilo, is the same as a Dutch kilo...
My example demonstrated that an AIB 9.8% APR did not equal a BOI 9.8% APR. Both quotes were from the personal loan calculators on the respective websites.

Apologies for the confusion, I should have stated that I was using different quoted figures. 

The AIB / BOI comparison used their quotes for repayments "inclusive of payment protection" for the simple reason that the APR's matched but the repayments differed.
When working out the cheapest loan I used their repayments "exclusive of repayment protection insurance". (The APR's quoted did differ for these)

It could be misinterpreted as bandying figures about willy nilly, but luckily you're not a cynic, that thought never crossed your mind and my reputation is unsullied!


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## darag (27 Mar 2004)

*Re: Re:Re: value of apr*

hi crudgers;  if you really want a standard formula it's out there in any book on basic finance.  prepare to be shocked, but there are legally binding actuarial rules for the calculation of annual percentage rate in many countries and they all use this standard formula.  it's not that i'm an expert in such matters; the first thing that came up from google was regulation z in the states, for example, which forces credit card companies to use this formula.

i'm not in the least bit surprised that you would admit that "the aprs quoted did differ for these" when the repayments were different even though you presented these repayment figures are solid proof that apr was a flawed concept.  strangely, i had a sneaking suspicion that you were happy to include figures unrelated to the loan repayments into your numbers.  the first set of numbers (relating to the aib loan) that i looked at just didn't add up.   if you want to make an honest attempt at showing the flaws of apr, please go ahead.  if you want to prove that one institution is cheaper than another for loans then start a different discussion.

your example did not demonstrate that aib's apr was different to boi's apr.  it showed that aib's loan repayment plus an optional insurance premium was more than boi's loan repayment plus an optional premium for a different insurance policy.


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## crugers (27 Mar 2004)

*Re: value of APR*

Hi darag
My apologies again darag. It seems I have inadvertently confused, as you said yourself, "...the few brain cells..." you've left.
What I want is a Standard APR formula that can be relied upon by all and used by all, not one that is used in "...many countries...". One like the "spud" kilo, same worldwide!
You are absolutely right when you said:
"...your example did not demonstrate that aib's apr was different to boi's apr..."
Luckily that's what I was trying to do!
AIB 9.8% APR on €10k; BOI 9.8% APR on €10k. They quote the same APR.
But what it did prove is that 9.8% APR means something different in AIB and BOI.
If the only information you were given was that you had to choose the cheapest loan - €10k over 60 months @9.8% APR, you can't say which is best. You need more information. You end up paying more with one. But which one?
So how can you rely on the quoted APR as a definitive guide to best value?
As you will see, here in this thread, I have not attempted "...to prove that one institution is cheaper than another for loans..."
I've stuck to the APR issue!
But isn't that the point of APR's, to prove one loan is cheaper, or dearer, than another, comparatively speaking?


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## Brendan Burgess (28 Mar 2004)

*Re: value of APR*

The formula for APR is set out in the Consumer Credit Act. 

They really should not differ and I will draw this issue to the attention of IFSRA who should check to see if it needs to be redefined or if AIB or BoI has got it wrong.

Brendan


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## darag (28 Mar 2004)

*Re: value of APR*

crudgers, yes you can simply use the apr figure.  the figures you quoted to "prove" the flaws with apr included an optional payment protection insurance.  if you want to use the spuds analogy - it's like claiming that comparing cost per kilo for spuds is flawed because a head of cabbage and a four kilo bag of spuds costs more in one supermarket than another even though the cost per kilo for spuds is less.

i very much doubt that us irish decided to reinvent the formula for calculation interest rates.  while very small variations can happen depending on the way the figures are rounded during the calculation, if there is a difference of more than .5% in the level of repayments given the same loan amount and payment schedule, then it is very likely that someone has made a mistake in their calculation.  the flaw is then with whoever miscalculated, not with the concept of apr.


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## crugers (30 Mar 2004)

*Value of APR*

Hi darag
You said:
"...i very much doubt that us irish decided to reinvent the formula..."
But you did ((1+r-f(1+d))/(1-f) - 1), because the formula as is, won't work where CU's require savings to be kept in place for the duration of the loan.
I'd like an APR formula that can do the biz for all!

I revisited both BOI and AIB loan calculators today and found:
AIB Quote:
10000 for 60 mths @9.8% APR fixed rate, no payment protection Monthly payment: €208.40
BOI Quote:
10000 for 60 mths @9.8% APR, fixed rate, no payment protection Monthly payment: €214.49

Looks like "...someone has made a mistake in their calculation..."


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## darag (30 Mar 2004)

*Re: Value of APR*

crugers, yes someone has made a mistake in their calculation and it's bank of ireland.  as i pointed out earlier the monthly repayments should be around 209.50.  i pointed this discrepency to them and they responded very quickly admitting that there is a bug in the calculator and they have promised to correct it asap.                                                                                 so you can soon bask in the pleasure of playing with two loan calculators which agree with each other when using the same apr.  what mysterious force could be the cause of such a wonderous harmony?  cast aside your heretical disbelief and offer up praise and thanks to the standard formula for apr.

the reason calculating apr for credit unions is more difficult is because the usual formula does not have a provision for taking "manditory savings" into account as no other lenders have this requirement.  i have offered to apply myself to coming up with a formula if someone will explain how credit union lending policies work.  i've asked some basic questions in the other thread and if you would be so kind to answer them, i'll see what i can come up with.  i believe the formula you quote may not be correct because there is a suggestion that members are not allowed to reduce your savings as the loan balance decreases.  if that is the case, then my formula is wrong.


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## Brendan Burgess (30 Mar 2004)

*Re: Value of APR*

Hi darag

It's very difficult to get a straight answer from the Credit Unions. In fact, it's quite difficult to get any response from them. 

By and large they will tell you that the old formula of £4 of a loan for every £1 of savings is old hat. But then they tell you that you need some level of savings.

My local credit union has not yet responded to me explaining how the interest is calculated. On the reducing principal or on the outstanding balance. 

Brendan


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## crugers (30 Mar 2004)

*Value of APR*

Hi darag
I never doubted that if the same APR formula were used consistently the same answer would result across the board. Since it can't take into account the allegedly "onerous", legal requirement, of shares in CU's, it won't work, as is, for CU loans.
Brendan
Credit Union Act 1997 Section 38(1)(a) states:
"...the interest on a loan shall not at any time exceed one per cent per month on the amount of the loan outstanding at that time;..."
As I explained before, a loan in a credit union is the amount borrowed. Interest is charged on that amount only. As you make repayments off the principal the interest is charged on the reduced principal only. Interest is never charged on interest. Interest is charged on the loan amount outstanding since you last made a repayment of principal. So, if you take out a loan of €100 @ 9% interest rate, and only come back 1 year later, you will owe €9 interest and €100 principal. If you took out the loan and stayed away 2 years you would owe €18 interest and €100 principal.
Interest is NOT posted to your account.
Interest on members loans is recognised when payment is received as specified in Section 110 (1)(c) (1) of the Act (i.e. on a cash basis).

BTW How many of the 500+ independent, autonomous credit unions did you contact and how many got back to you?

And, anybody who is knowingly charged more than 12% interest (not 12%APR) can get their money(interest paid) back! Lever Bros eat your heart out!

Whoops - we seem to be drifting away from strictly APR issues, again...


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## darag (31 Mar 2004)

*Re: Value of APR*

sorry crugers but you claim you never doubted that a consistent apr formula (which is what banks are obliged to use) would lead to the same answer but from the other thread you constantly dismiss the value of the apr calculation.  for example:


> What is APR? Is it the Annual Percentage Rate? Is it the Actual
> Percentage Rate? Is it the be all and end all irrefutable, indisputable,
> rock solid reliable ratio that guarantees level comparison? No!
> It is a fairly good indicator at best. You just can't work backwards
> from a quoted APR and be sure you are correct.


or


> Its not that I don't like APR's. They are, as quoted by various lending
> institutions, not an exact science.


or


> APR. Is it all that it is made up to be? In it's present guise I still
> say that it is only an indicator and whether CU's quote it or not, it
> can't be used as the bottom line for loan comparison.


or


> So APR is a calculation, a type of statistic, and we should all be aware
> what can be done with statistics...


i know you have reason for confusion given that the bank of ireland's online calculator was wrong but i really think you're missing a fundamental point regarding apr.  it is a totally scientific, irrefutable and basic measure of value when it comes to borrowing.  it provides a measure which allows you to work out the total cost of the borrowing given any repayment schedule or amount borrowed.  if you have an apr figure, then you know how much it will cost you under all sorts of conditions.

by the way thanks for explaining how interest is calculated for credit union loans.  it's certainly different to the way banks calculate it.  i'm still interested in whether you are generally obliged to maintain your original level of savings (say 2k on a 10k loan) until the loan is paid off?


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## Brendan Burgess (31 Mar 2004)

*Re: Value of APR*

Crugers

Thanks for that technical and detailed answer. It does make it more difficult to calculate APR, as the APR would be lower for defaulters who don't pay off their loan until really pressed and it would also be lower for those who pay monthly instead of weekly. While it makes it more difficult,it doesn't make it impossible.



> BTW How many of the 500+ independent, autonomous credit unions did you contact and how many got back to you?



I never managed to get a proper explanation/defence of the CU's approach, apart from your posts on Askaboutmoney:

I phoned the then Chief Executive of the League twice and he never returned my call.
I have phoned about 5 individual credit unions and they have all misled me on the true cost of borrowing, with statments such as "We charge 9%, but because it's on a reducing balance, the real cost is 4.5%".
Most recently I emailed my local Credit Union in Sandymount and they emailed me back asking me to phone them. I replied saying that I want it officially in writing. 

Please don't think I am too cynical, but I will be only 100% convinced, when I see a detailed CU statement. I will try to get one to see it. I don't know anyone with a CU loan.

Brendan


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## crugers (31 Mar 2004)

*Value of APR*

Hi darag
You quoted me:
Quote#1 “…You just can't work backwards from a quoted APR and be sure you are correct…”
BOI quoted an APR of 9.8% but without the monthly repayments we couldn’t be sure the quoted APR was correct. It wasn’t. But we only proved that by referring to the monthly repayments.
Quote #2 “…They are, as quoted by various lending institutions, not an exact science…”. BOI have admitted the quoted APR was incorrect, I would say that was a good example of inexact science.
Quote #3 “…it can't be used as the bottom line for loan comparison…” As per #1 above. In the absence of details other than a quoted APR figures, can we be sure that the correct APR is, as quoted? No!
Quote #4 “…So APR is a calculation…we should all be aware what can be done…” For one, there can be a miscalculation. Get more information, then and only then can the quoted APR be confirmed as being “…totally scientific…”

I don’t have reason for confusion, I have reason to question. In an ideal world “…a totally scientific, irrefutable and basic measure…” for calculating APR could be relied upon. Welcome to the real world! If you have a CORRECT APR figure then you will know how much it costs. But you will need more that the quoted APR figure to be sure that the quoted APR figure IS correct!

The Credit Union Act 1997 Section 32 (3) allows for withdrawals of savings down to 25% of the outstanding liability and Section 32(4) allows the Registrar to amend that percentage, up or down, if he sees fit to do so.
However the act does not specify how much savings you must have before getting a loan, other than the minimum required to be a full member of a credit union (presently <=IR£10 or as prescribed by the Minister).

Individual Credit Unions (and they are all individual…) will make loans of multiples of savings. Some base the loan limits strictly on a 3:1 or 4:1 or 5:1 etc., ratio of loan:savings. Some use the “ability to repay” scenario, by referring to the members regular savings over a timescale. However, these days, as with mortgage lenders, more credit unions would use household income as a measure of “ability to pay”. There are few hard and fast rules on loan limits that could be considered as being in use “movement wide” other than those specified the Credit Union Act Section 35.

Maybe these and other previously mentioned "features" of credit unions have influenced the lack of a legal requirement to quote a "simple" APR?


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## darag (2 Apr 2004)

*Re: Value of APR*

hi crugers.  your defense of your position is akin to arguing that long multiplication is not an exact method because someone at some stage made a mistake and multiplied 13 by 7 and came up with 81.  apr calculations are either right or wrong. the formalae are standard and anyone can check someone else's figures and categorically state whether they are right or wrong.

this is what made it possible to be able to confidently go to bank of ireland and tell them they'd made a mistake. i looked at the site, plugged the figures into a excel using the built in pmt function and "worked backwards" to a monthly payment of 209.50.  for example,  contains formula to work backwards and forwards from apr to payment amount, etc.  of course it is possible to make a mistake when using the formula, but that doesn't mean the formula itself is not trustworthy.

thanks for more details on credit union loans,  but my question is pretty specific.  if you are given a loan by your union and that loan is backed up by a certain amount of savings,  do credit unions generally insist that you NOT reduce your amount of savings until the loan is paid off?

also, i'm fascinated by the way the interest is calculated.  brendan raises this point too.  if, for example, i borrow 10 grand at an interest rate of 9% intending to pay it off over three years, why would i ever give the credit union a penny of interest until the end?  even if i had the 900 quid for the interest due at the end of the first year, i'd be mad to give it to the credit union when i could just put it on deposit somewhere for three years (earning lets say 60 quid interest).  at the end of the three years, i could give them the 900 quid but keep the earned interest for myself.  this way of calculating interest rewards late payment.


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## crugers (3 Apr 2004)

*Re: Value of APR*

Hi darag
“…your defense of your position is akin to arguing that long multiplication is not an exact method because…”
No! Don’t think so…
It would be like someone telling me that 13 times a certain number equals 81. They maintain it is 7 but I have to work out (1) that they think it is 7, and (2) that it is really 6.230769!
I don’t trust QUOTED APR’s. That’s what I said and I stick to it!
BOI miscalculated and mis-quoted.
QED!
Formulae and Excel calculations, I love, trust and use on a daily basis.

All quoted APR should be checked for accuracy. If the only information given is the loan amount, the QUOTED APR and the term, the accuracy can’t be confirmed because “all charges” must be included. However if they quote their expected monthly repayment then the accuracy of their calculation can be confirmed.

Your question on CU loans may be “…pretty specific…” but with 500+ independent, autonomous credit unions the answer would be no more than an educated guess. To comply with the CU Act they shouldn’t allow withdrawals below 25% of outstanding liability. Whether they do allow withdrawals, at any time when liability exceeds savings, would be a policy decision for the Board of each and every credit union.

As for the last bit I’m afraid I’m lost!
Either I have explained it badly, you’ve missed something or I’m missing something in your logic.
If you took a €10k loan @9% over 3 years making regular monthly repayments you would expect to pay €1387.50 in interest over the 3 years.
If you repaid it in 3 regular annual repayments you would expect to pay €1800 in interest over the 3 years.
If you repaid it in 1 lump sum at the end of three years you would expect to pay €2700 interest.
I just can’t see where it would be cheaper to pay late! Am I missing something?

CU loans are normally repaid weekly, fortnightly or monthly. I have never come across CU loans as in the annual or tri-annual repayment “examples” above, but the interest calculations are hypothetically correct.
It would all depend on the repayment schedule, agreed and signed for. Members who don’t adhere to the agreed repayment schedule would be affecting their credit ratings in the CU, and may find it harder to get their next loan.


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## Slim (6 Apr 2004)

*Re: Value of APR*

Brendan

You wondered if the CU charged interest on 



> On the reducing principal or on the outstanding balance.



What is the difference?

Slim 8)


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## Slim (6 Apr 2004)

*Re: Value of APR*

Ignore that question. I just read the explanation on the other CU thread. Sorry.

Slim 8)


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## darag (6 Apr 2004)

*Re: Value of APR*

crudgers, i believe your previous objections to apr were a bit stronger than simply being unable to "trust quoted apr figures" but i think it's pointless getting into an argument about this point.  anyone who is interested can check some of your earlier messages and see your very strident claims that apr calculations are not scientific, just a statistic, not a basis for comparing loan value, etc. 

i think you missed the point of the long multiplication analogy because you repeat the same argument again.  i don't trust long multiplication.  when i was in primary school percy hayes made a mistake in his long multiplication homework. qed.



> If the only information given is the loan amount, the QUOTED APR and the
> term, the accuracy can~Rt be confirmed because ~Sall charges~T must be
> included.


i can't make sense of this; maybe you mistyped something?  the loan amount, the apr and the term are all completely independent variables.  what accuracy are you talking about?  and would it be verifyable if all charges were not included?

i'll move back to the other thread to explain the point of the last bit of my message as it relates more to credit unions' interest calculations than to the concept of apr.


----------



## Dominic (10 Apr 2004)

*Annual Percentage Rate*

The problem with the APR is that Minister Pat Rabbitte (for ir was he at the time) allowed 'interest and charges' to be mixed into the one calculation. This makes the calculation difficult to untange and why we get apparent differences with the same payment and interest rates for one isntitution being different to another (apart from them also not knowing how to do it.)

If they had segrated 'interest' to APR; and charges as '€x per quarter' or whatever.. it would have made the thing some what easier to digest.

Dominic


----------



## rainyday (10 Apr 2004)

*Re: Annual Percentage Rate*

But isn't that the whole purpose of the APR, Dominic - to make it easy for the consumer to compare like with like by including ALL charges in the calculation?


----------



## crugers (11 Apr 2004)

*Re: Value of APR*

Hi darag
I took your advice and revisited all the posts, including my own. On balance the majority of my posts did say “quoted APR”.
While doing the revisiting, you advise to look out for
_“… very strident claims that apr calculations are…”:_
_“…not scientific…” _ I said _“…They are, *as quoted* by various lending institutions, not an exact science…”_
_“…just a statistic…”_ I said _“…So APR is a calculation, a type of statistic…”_  So it is, a type of mathematically summarised representation of the facts. I went on to say _“…and we should be aware what can be done with statistics…”_
_“…not a basis for comparing loan value…”_ What I said was _“…In it’s present guise I still say it is only an indicator and whether CU’s quote it or not, it can’t be used as the bottom line for loan comparison…”_ I think there has been widespread agreement that the present method of calculation of APR does not do the biz for CU loans, interest calculations and lending policies. So when trying to compare loans for all institutions, including CU’s, the _“standard formula for APR”_ has its limitations.

_“…i think you missed the point of the long multiplication analogy…”_
Could be because I didn’t know Percy Hayes and never knew he made the alleged miscalculation!  
Tofu can be analogous to beef but it ain’t no fillet steak and to compare the two would be ridiculous. Analogies, like statistics, usually contain the bias of their creator.

You said _“… maybe you mistyped something?…”_
Hmmmmmm!
A few extracts from your posts!
_“…crudgers…”, “…verifyable…”, “…formalae…”, “…defense…”, “…into a excel…”, “…liter…”, “…on advantage of…”, “…discrepency…”, “…manditory…”, “…seemd…”, “…sharpend…”, “…acount…”, “…minumum…”, “…balaces…”, “…relevent…”, “…requirment…”, “…errouneous…”, “…disingenious…”, “…caclulators…”_
And finally _“…can~Rt be confirmed because ~Sall charges~T…”_
You say _“…i can't make sense of this…”_ May be your keyboard or regional settings? :lol 

The actual quote, misquoted, was _“…All quoted APR should be checked for accuracy. If the only information given is the loan amount, the QUOTED APR and the term, the accuracy can’t be confirmed because “all charges” must be included…”_
You ask _“…what accuracy are you talking about?…”_ I would have thought it was obvious, from the context, that it was the accuracy of the quoted APR.
BOI don’t seem too pushed to fix the problem with their online calculator since it is still showing the erroneous quotes where, either the APR or repayments are wrong.
AIB seem to have adjusted their calculator to quote just “typical APR” figures. At least with typical APR you know it is dodgy to rely on the accuracy in any one particular situation.
Permanent TSB tend towards the generic by also quoting “typical APR” figures. On their web page [broken link removed] they quote that loans for “…New cars over € 9,000:- Typical APR 6.9%; Used cars and new cars under € 9,000:- Typical APR 7.9%; Purchase Instalment Fee of € 1…”. However, proceed a further few link clicks and on their web page [broken link removed] they quote that loans for “…New cars over € 9,000: - Typical APR 7.9%; Used cars and new cars under € 9,000: - Typical APR 8.9%; Purchase Instalment Fee of € 1…”

As for the last bit of your post, I too moved back to the Cost of Credit Union borrowing to reply.


----------



## darag (15 Apr 2004)

*Re: Value of APR*

crugers,  you'll have to give me a bit of time as i devote myself to the task of compiling a list of your spelling mistakes in response.  i know this is a waste of time but since it doesn't require that much effort i'll restate; the reason i asked whether you mistyped something is because your claim, like many of the rest of your statements,  made no logical sense.  i picked this claim because it is such an obvious non-sequitor. given the loan amount, the apr and the term, you cannot verify anything but this fact has nothing to do with whether charges are included or not.  those three aspects of a loan are independent of each other and all can vary indepdently.  to be honest, this has become a pissing contest and i've lost interest.  


dominic, if it was pat rabbitte, it wasn't some novelty on his part to include all the charges into the apr figure.  that's the way it's done everywhere else in the world and for good reason.  institutions would be able to quote all sorts of rates by hiding the costs of the loan in charges.  how would you be able to compare for value a loan at a 9.5% rate with 12 euro a month in charges with a loan at 8.9% with 20 euro a quarter charges?  the attraction of apr figures for consumers is that they provide you with a single figure which represents the cost of credit.


----------



## Dominic (15 Apr 2004)

*Apr- complexity*

Of course the idea was that the APR was to make 'interest rates' comparable. Once you lump in charges the calculations are impossible to untangle. I think people could see charges of €10 per quarter as clear in itself; separate to the APR. The APR then would be compatable as to interest, which was all it was supposed to do.

Its better having it the way it is than having nothing.

Dominic


----------



## rainyday (15 Apr 2004)

*Re: Apr- complexity*

I disagree. There is no value to the consumer in making interest rates comparable, without taking into account all charges and fees. While a charge of €10 per quarter may be clear in itself, the real question is how does a charge of €10 per quarter compare to an additional 0.05% on the interest rate. Without an APR which takes all such charges into account, the consumer has little hope of getting the best value.


----------



## crugers (16 Apr 2004)

Hi *darag*
To be honest darag I took it that you were just trying to wind me up! And to save you the time I had gone over my posts too! _“…difinitive, facination, skeptisism. benfit, installments., regularily, arkward…”_ We’re all, human.

However, to use the [broken link removed] in the Consumer Credit Act 1995, and solve for “i”, you are required, as I read it, to have the following details:
the loan amount, and the repayment schedule by amount and by time, and the amount of charges, and since the equation is to be solved by _“…, by successive approximations…”_ it is useful to have the quoted APR just to save time.
The examples given in the Act demonstrate that to solve the equation, when charges are involved, you are required to deduct the charges from the loan amount i.e. a loan of €1000 which incurs an administration fee of €50 is, in effect, a loan of €950.

You have said that you could use Excel formula but I have compared results for both Excel and the CC Act formula and there are differences. Some small, some bigger than others. Depending on the loan size the result to the consumer could significantly effect their “values”.


BTW I gave up pissing for lent……I’m pissing for height now!:lol 

*Dominic*

I don’t think we can blame Pat alone for the decisions of the EU for it was their directive that gave us the APR formula.
Reading the Consumer Credit Act 1995, it is obvious that the formula we now have, was not in use across the board even within the EU. 

“…COUNCIL DIRECTIVE 87/102/EEC AND COUNCIL DIRECTIVE 90/88/EEC: PART I: COUNCIL DIRECTIVE of 22 December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit
    Whereas, not later than 1 January 1995, the Commission should present to the Council a report concerning the operation of this Directive,
HAS ADOPTED THIS DIRECTIVE
Article 5: By way of derogation from Articles 3 and 4 (2), and pending a decision on the introduction of a Community method or methods of calculating the annual percentage rate of charge, those Member States which, at the time of notification of this Directive, do not require the annual percentage rate of charge to be shown or which do not have an established method for its calculation, shall at least require the total cost of the credit to the consumer to be indicated…”

And

“…COUNCIL DIRECTIVE of 22 February 1990 amending Directive 87/102/EEC for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit (90/88/EEC)
Whereas Article 5 of Council Directive 87/102/EEC(4) provides for the introduction of a Community method or methods of calculating the annual percentage rate of lcharge for consumer credit;
Whereas it is desirable, in order to promote the establishment and functioning the internal market and to ensure that consumers benefit from a high level of protection, that one method of calculating the said annual percentage rate of charge should be used throughout the Community;
 Whereas it is desirable, with a view to introducing such a method and in accordance with the definition of the total cost of credit to the consumer, to draw up a single mathematical formula for calculating the annual percentage rate of charge and for determining credit cost items to be used in the calculation by indicating those costs which must not be taken into account;
Whereas, during a traditional period, Member States which prior to the date of notification of this Directive, apply laws which permit the use of another mathematical formula for calculating the annual percentage rate of charge may continue to apply such laws;
  Whereas, before expiry of the transitional period and in the light of experience, the Council will, on the basis of a proposal from the Commission, take a decision which will make it possible to apply a single Community mathematical formula;
  Whereas it is desirable, whenever necessary, to adopt certain hypotheses for calculating the annual percentage rate of charge;
HAS ADOPTED THIS DIRECTIVE:
Article 1
Directive 87/102/EEC is hereby amended as follows:
1. In Article 1 (2), points (d) and (e) shall be replaced by the following:
'( d ) "total cost of the credit to the consumer" means all the costs, including interest and other charges, which the consumer has to pay for the credit.';
'( e ) "annual percentage rate of charge" means the total cost of the credit to the consumer, expressed as an annual percentage of the amount of the credit granted and calculated in accordance with Article 1a'.
2. The following Article shall be inserted:
     'Article 1a
1. ( a ) *The annual percentage rate of charge, which shall be that equivalent, on an annual basis, to the present value of all commitments (loans, repayments and charges), future or existing, agreed by the creditor and the borrower, shall be calculated in accordance with the mathematical formula set out in Annex II*.
( b ) Four examples of the method of calculation are given in Annex III, by way of illustration….”

The formula in Annex II won’t copy and paste so you’ll have to follow the [broken link removed].

*Rainyday*
The APR formula, as laid out in the Consumer Credit Act 1995, if it can be applied across ALL financial institutions will provide a valuable basis for “equal” comparison.
To date, no one has been able to interpret/define the CU policy of requiring savings in a way that could be applied within the ACT’s APR formula.
I’m concerned that in my previous examples of interest paid on a €10k CU loan over 3 years (see Cost of CU borrowing 3/4/04), Brendan has worked out that despite the fact that interest paid on the loan by weekly instalments is less than the interest paid on monthly instalments, that the APR works out highest for weekly! There is an anomaly there somewhere!


----------



## Dominic (17 Apr 2004)

*Apr- complexity*

Folks:

When this was originally brought into CCA it was designed to cover the following type of abuse:

Borrow €1000 over three years at 6%.
Total: €1000 x 6% x 3 = €1180 which for 36 months is €32.77.

The APR on this using that nice formula is to get the Internal Rate Of Return by solving for 'i'. So we get 11% or what ever the exact figure is.

When periodic charges unrelated to the loan amount are thrown in ..the formula handles them  fine .. but the result is just a % and you cannot untangle it.

Whereas in a 'vanilla' loan ..you can tell how the institution capitalises interest e.g monthly, quarterly or annually.

My point was to render 'interest' to APR;
Highlight periodic charges separately ;
Together you get the total picture.

Take a look at the absurd situation on Current Account Overdrafts .. and you will realise the mess.

Dominic


----------



## crugers (19 Sep 2004)

*Re: Value of quoted APR*

IFSRA just published their latest survey results on the cost of personal loans.
[broken link removed]

How about a quiz based on the published results?

Q(1) Which is best value (cheaper):
AIB Variable €2k loan @ APR 9.8%, or
Premier Direct Variable €2k @ APR 9.6%
A(1) AIB @ APR 9.8%

Q(2) Which is best value (cheaper):
AIB Fixed €2k loan @ APR 10.90%, or
BOI Fixed €2k loan @ APR 10.90%
A(2) AIB @ APR 10.90%

Q(3) Which is best value (cheaper):
Tesco €6k @ APR 8.90%, or
NIB €6k @ APR 8.90%
Hint:


> Tesco was also the cheapest for a €6000 loan to be repaid over a three year term. IT 15/09/04


A(3) Tesco

Q(4) Which has the lower APR on a €10k loan:
ACC 60 x €209.64 per month and set up fee of €63.49, or
AIB 60 x €208.35 per month and no set up fee.
A(4) ACC @ APR 9.5% (beats AIB @ APR 9.8%)

IFSRA say 





> Total cost of credit...It is the best way of comparing different loans....



Shouldn't we be able to rely on APR?


----------



## darag (19 Sep 2004)

*Re: Value of quoted APR*

glad to see you're keeping a beady eye on interest rates, crudgers.  the eternal apr debate rolls on.  that document from the ifsra shows what a bunch of muppets they are.

first of all question 1; from looking at the aib website, the ifsra have mixed up two different personal loan products in the aib column - they quote the apr for general personal loans but the repayments for "gain account" loans.  the apr on the latter is 8.7% which is what should be in the apr column or instead they should have 175.25 (or thereabouts) in the repayment column.

next question... again, they've muddled two different aib products or something; it's not possible to check online as aib ask you to request a quote for fixed rate loans.  the boi apr and repayment is correct.  either the repayment or the apr is incorrect in the aib column.  you just can't trust those repayment figures can you?  they're just not scientific.

as a general point, look at the figures in "total cost of credit" row in the tables.  i've looked a three and they don't add up.  some seem to have been rounded while others aren't but are still out.  it doesn't inspire a whole lot of confidence in the survey.

regarding question 3.  to be fair there is no big obvious mistake like there is in the previous questions but either the ifsra has misquoted figures or both tesco and nib have miscalculated albeit only by a few cent.  the repayments should be exactly 189.56 a month while tesco charge 3 cent less and nib charge 10 cent more than this.  strictly speaking, both are in breach of the customer credit act albeit only by a few cent.

regarding question 4.  this is another tricky one.  i can't get the rates or repayments from the acc web site to check this column but the figures in the column are incorrect - either the apr is too low or the repayments are two high.  nor do the figures in the aib column match up.

besides being unable to perform the simplest of arithmetic checks (regarding the figures in the "total cost of credit" columns not reckoning with the "monthly repayments" columns) nor having the ability to plug figures into excel to check consistency between interest rates and repayments, the ifsra advise to use total cost of credit to compare loans.  this is rubbish and any serious consumer advise information advises against this.  i guess they reckon that for a punter borrowing one grand, paying back 100 a month for a year offers equal value to paying back 20 a month over 5 years?


----------



## Brendan Burgess (20 Sep 2004)

*Re: Value of quoted APR*

Hi crugers

I agree with Darag's assessment of IFSRA. They really don't have any idea of how to do surveys like this. The Consumer Credit Act stupidly looks at total cost of credit which is really crazy. It's like adding apples, oranges, pears and some exotic fruits.

I caught the back end of an intrview with an IFSRA representative on 5-7 live. The presenter made some comment to the effect that "the credit unions were obviously cheper than the banks" and the IFSRA representative agreed with him! I wanted to scream. OK, live radio is difficult but IFSRA should be issuing a warning anytime anyone recommends the Credit Unions to point out how much more expensive than the banks many of them really are.

Brendan


----------



## crugers (20 Sep 2004)

*Re: Value of quoted APR*

Still relying on the sweeping generality of Myth #1, I see Brendan.

Some things the survey did show:

How much more expensive than _(some of)_ the banks many of them _(banks)_ really are, just as some credit unions are, and many are not!

Some of them (banks) charge obscene interest unlike credit unions which never can by law charge more than APR 12.68%.

40% of those (banks) that issue smaller loans charge interest above the MAXIMUM allowed by law in credit unions.

*Not one of them* (banks), that issue smaller loans, charged less than or equal to my credit unions APR of 9.34%.



> The Consumer Credit Act stupidly looks at total cost of credit which is really crazy.


The Consumer Credit Act defines APR as:
_"APR" means the annual percentage rate of charge, being the *total cost of credit* to the consumer, expressed as an annual percentage of the amount of credit granted and calculated in accordance with section 9._

It also defines the formula for calculation of APR. 

The APR can not be calculated without knowing the *total cost of credit*.

Now back to the topic!

What do you really think of the "Value of quoted APR's"?

Is it a smoothie or a mixed up fruit salad?:rollin


----------



## darag (20 Sep 2004)

*Re: Value of quoted APR*



> What do you really think of the "Value of quoted APR's"?



not much if the wrong apr is quoted.  similarly if the wrong repayment amount is quoted (as it is in one of the aib columns), it's not much use either for comparing loans.  except to make the naive come to the wrong conclusion; cruger's own answer to their question 1 is in fact wrong as aib are not in fact the cheapest.  qed, comparing repayment amounts is useless for comparing loan value according to cruger logic.

credit union "apr" figures are a fiction and have little to do with the real cost of their loans so your claims about credit union interest rates are worthless.


----------



## Brendan Burgess (20 Sep 2004)

*Re: Value of quoted APR*

Hi crugers

 I don't set out to win arguments. I set out to find the right answer. 



> No. 1. The Credit Union offers good value to borrowers.



I put this forward as a myth - and it was too sweeping a generalisation as you pointed out. You have pointed out that some Credit Unions are good value and, I accept that *some*might be.

That is why I said in my post:



> IFSRA should be issuing a warning anytime anyone recommends the Credit Unions to point out how much more expensive than the banks *many* of them really are.



I used the word "many". I don't say "all". 

Thanks for educating me in this matter. 

Now you should learn from my example. Do you accept that "many" credit unions are much more expensive than the banks? Do you accept that all Credit Unions mislead their members about the true cost of borrowing, because they never factor in the cost of deposits? 

I don't think either of us will ever win the debate. I have learned something from it. I hope that you can as well. 

Brendan


----------



## crugers (20 Sep 2004)

*Value of quoted APR*

Hi darag
here we go again...
the question was:


> Q(1) Which is best value (cheaper):


If you end up paying AIB €2092.20 and Premier €2100.84 I would have thought that AIB WAS cheaper! But I'm willing to learn!



> credit union "apr" figures are a fiction


It depends! I took the universally accepted method for calculating the APR as set out in the Consumer Credit Act and calculated the APR for my credit union, correctly.

Now! The question is: Because some CU's apply policies that require large sums to be held on deposit, can the formula for APR be used in these cases. And if it is, is it giving a true basis for comparison...
It may be one of the reasons why CU's are excluded from the Act!
However I really think that if I repay a loan and I end up paying less it can hardly be said to be worthless!

Brendan
I do accept that you said many and not all. But little things mean at lot and Myth #1 didn't say "many" or "some" or "all". it lumped all CU's into the singular "The Credit Union".
For my part I don't think I've ever put forward the idea that ALL, or even MOST, CU's are better value than banks. Competition does mean that lending institutions differ, some banks are expensive, some CU's are expensive, some banks are fair to middling, some CU's too. Some banks charge below the odds and likewise there are CU's that charge interest as low as possible!

Myth #1 could just as well apply to all financial institutions.
Some do, some don't!
I just couldn't accept nor see why you specified and singled out CU's alone for Myth #1 when I know that many/some do beat banks hands down even when rates are at an all time low!
As for ALL CU's misleading their members I have to say NO! Just like Myth #1, they don't ALL mislead. Some do, some don't! Of those that do, is it intentional? Don't know! I would hope not! What would be the motive? They don't have anything to gain! It is not like the stock will rise on the market! Surplus is returned to the members! It is their money that is out on loan!

I've learned lots from the debate! (Next time I might keep my head down!!!)


----------



## zag (21 Sep 2004)

*Re: Value of quoted APR*

Well holy god, after much trawling and following of links which claimed to explain it all (including the act), I am still not entirely convinced I am using the correct formula to calculate APR.

Given the following :
Amount of credit advanced : 18,000
Period of agreement : 48 months
Number of repayment instalments : 48 (monthly)
Amount of each instalment : 435 (including first repayment after 1 month)
Total amount repayable : 20,880
Cost of credit : 2,880

Can someone tell me the APR on this loan ?  The paperwork I have indicates 7.70% and a "Fixed rate of interest" of 4.00% PA

My rough calculations (7.7352%) indicate that the quoted APR isn't quite right.  It isn't a whole lot over the period (about 30c extra per repayment), but the agreement specifically states 7.7*0*% which is not 7.7*3*%

Adjusting the timing element from (x/12) to (y/365) where x is the number of months and y is the number of days per month per year only reduces the rate to 7.7*2*

Can anyone see how to get the APR equal to 7.70% ?  There is of course the possibility that there is some annual charge (the APR is to include all charges) which hasn't happened yet.

z


----------



## zag (22 Sep 2004)

*Re: Value of quoted APR*

Ah guys, don't stop debating just because I gave some figures.

I am interested in how the figures work out using what people consider to be the official approach.

z


----------



## Brendan Burgess (24 Sep 2004)

*Re: Value of quoted APR*

Sorry zag

I can't throw any light on it. I tried to use the rate function in Excel, but I got crazy results, so I musn't be using it right.

I don't understand the formulas in the Fourth Schedule of the Consumer Credit Act which sets out how it can be calculated.
Note that SEction 9(2) states that "The Minister may...amend the method of calculating APR..."

So I think you should be happy with your difference of .003%

Brendan


----------



## darag (24 Sep 2004)

*Re: Value of quoted APR*

i get the same answers as you zag.  i suspect that they are simply rounding the repayment amounts to the nearest euro.  the repayments should be 434.73 by my calculations.


----------



## crugers (24 Sep 2004)

*Re: Value of quoted APR*

Hi Zag
Yup! Something we agree on is that the numbers you have don't add (divide, multiply, subtract) up *exactly*!
The Consumer Credit Act 1995 S9(1)does say:


> In this Act the APR shall be the equivalent, on an annual basis, of the present value of all commitments (loans, repayments and charges), future or existing, agreed by the creditor and the consumer, *calculated to the nearest rounded decimal place* in accordance with the method of calculation specified in the Fourth Schedule.


So there is a degree of approximation in quoted APR's.


----------



## darag (25 Sep 2004)

*Re: Value of quoted APR*

after all this time debating apr, i actually went and read the credit consumer act.

there are a few problems with the act that i see.  the first, as pointed out by crugers, is that section 9.1 allows the quoted rate to be rounded to the nearest decimal place.  this explains the anomalies that zag observed; the real rate is 7.73% or something but they are allowed to quote 7.7% as it's the nearest rounded decimal place.  i dunno why this was put into the act.  i know it's often only a matter of a few cent but it's still confusing to the consumer.  in the worst case (a real rate of 7.65 versus 7.749 both quoted as 7.7%), in zag's example would give a discrepancy of almost a euro per repayment.  i'd say that the institutions should be forced to quote an exact rate but that each repayment amount be rounded to the nearest cent.

the other problem is that the act doesn't fully address the rounding of time.  i dunno whether the effect is significant in practise (although you could contrive situations) but it states that the time values be calculated as fractions of a year but it does not specify how fine grained the values be.  i presume it doesn't oblige institutions to calculate interest on an hourly basis and yet you'd be annoyed if they calculated interest on a yearly basis.  i think this should have been specified in the act.  at the same time you want institutions to be allowed to treat monthly payments as occurring evenly 12 times a year (i.e.  treat the time between payments as 365.35 / 12) and not force them to uselessly have to adjust for variation in the number of days in a month.

also section 10.2 doesn't specifically include or exclude the credit union obligation to maintain savings as a cost of credit.  for me, this makes credit union "apr"s questionable at best (obviously crugers disagrees).  i feel that the spirit of the section would suggest that this aspect of credit union lending should be included in quoted apr values. this section should be tightened up.

by the way, the equation in the consumer credit act looks scary but it's actually reasonably straightforward.  it equates all flows of of money to and from the institution by converting them into their present value.  it's just the presentation is offputting and a bit of a mind bender when you first look at it.

to read the equation you need to be comfortable with the concept of present value which is the opposite of accumulating interest (future value).  for the sake of example, assume the apr is fixed at 10%;  the future value of a sum, say 200 quid, in one years time is 220, in two years it's 242 and so on.  present value answers the reverse question, 200 quid this time next year is only worth about 181.82 now, while 200 quid in two years time is only worth 165.29 now.  as far as the institution is concerned, if the interest rate is 10%, your promise of a payment of 200 quid in two years time is equal in value to their payment to you (loan) of 165.29 now.

in terms of equations, if a is the amount, t is the number of years (could be a fraction) and i is the interest rate, the present value of the amount is a / (i+1)^t.

if you add up the present value of all the payments the consumer makes to the institution, you get the right hand side of the equation in the act.  for example, if you make three payments of 300, 100 and 200 after 1, 3 and 4 years respectively, given a 10% interest rate, the total present value of these payments would be
    300 / 1.1
  + 100 / (1.1 * 1.1 * 1.1)
  + 200 / (1.1 * 1.1 * 1.1 * 1.1)
which is about 484.46.  in most cases, the repayments and the schedule of payments will be regular but the act properly accommodates irregular payments.

similarly, most loans are arranged as a single payment at "time zero" from the institution to the consumer.  in the above case, the loan amount would 484.46.  however the equation generalises this to cover cases where for example, the bank gives you the loan as a series of payments.  the left hand of the equation in the act represents the sum of the present values of the amounts the institution gives you (the loans).


----------



## crugers (26 Sep 2004)

*Re: Value of quoted APR*

Hi darag
Way to go! on the formula explanation....
To, probably, misquote Garret the Great: "...That's all very well in practice! But will it work in theory?..."
:rolleyes 



> i feel that the spirit of the section would suggest that this aspect of credit union lending should be included in quoted apr values. this section should be tightened up


Since CU's are NOT covered by the Act,
_Consumer Credit Act 1995 S3(2)"...This Act shall not apply to the following...(a)(i) a society which is registered as a credit union...by virtue of the Credit Union Act, 1996..",_
tightening up any section won't affect them.

So Credit Unions are NOT required to quote APR's. Why, I don't know!

So if a credit union is asked to quote its APR it has two choices:
Apply the formula as set out in the CCAct and be accused of "not including" something that can't be included (the requirement to maintain shares, if applicable), or
try to answer the question without quoting APR and be accused of obfuscation.
It is a no win situation for credit unions...

I still maintain that this is where the calculation of "Total Cost of Credit" as the best method of comparison, is applicable. How much will I end up paying back to XXX bank or YYY credit union. A borrower should also be informed if the CU requires a certain level of savings to be maintained.


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## sfag (1 Oct 2004)

*tuppance worth*

Dont know if this has been mentioned but in my opinion the rate of apr when quoted for fixed rates on mortgages is misleading.

As fixed rates are higher than current variable rates (eg by 2% say) you'll notice that the apr rate wont be 2% higher than the variable rate. This is because the apr is calculated over the whole loan period and not just the fixed period.

So if your loan is 20 years and your fixed period is 5 then 3/4's of the apr rate quoted for the fixed period rate will be distorted by the 15 years when the rate theoretically reverts back to the lower variable rate. Hence lenders can stick in a few fees to the fixed rate apr pot without driving the apr figure up significantly – therefore making it seem cheaper.

It's further distorted given the fact that in 5 years time the variable rate will probably be higher (else you wouldn't have bothered fixing) so the apr figure is actually distorted by a 5 year future figure set at todays rate.

I think apr on a fixed rate should quote you as if the entire period fixed - just like a fixed term personal loan.

That’s the way they used to calculate apr – maybe it’s changed ???


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## crugers (22 Dec 2004)

*Re: Value of quoted APR*

Well!
What do you know!

Subsequent to the banks bringing a case, to the powers that be in the EU, to _“level the playing pitch”_ for ALL financial institutions, as and from Q1 next year (2005) Credit Unions will phase out their Promissory Notes and MUST implement "Credit Agreements" for all loans issued in excess of €200.00.
Part of these "Credit Agreements" will be.....

Wait for it.....

*The obligation to quote APR....*

The formula quoted in the Consumer Credit Act 1995 will be used.
It does not, and cannot, take account of any obligation to maintain an amount of "savings".

Another great deal for the consumer courtesy of the banks, who brought you Dirtless Savings (until the “dirt” hit the fan), Foreign Exchange (foreign to the regulators anyway), Mortgage Interest (heavy on the mor(e)!).

Now when they push to restrict granting their loans to “locals”, or to minimise the “profits” extracted from their “customers”, or contribute to their community by working as volunteers, or agree never to charge more than 1% per month, then I might believe that they want to _“play ball”_!


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## rainyday (22 Dec 2004)

*Re: Value of quoted APR*



> It does not, and cannot, take account of any obligation to maintain an amount of "savings".


Hi Crugers - Wouldn't this particular angle give the CU's a competitive advantage over the banks?


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## daltonr (22 Dec 2004)

*Re: Value of quoted APR*



> The formula quoted in the Consumer Credit Act 1995 will be used.  It does not, and cannot, take account of any obligation to maintain an amount of "savings".



Of course it can take account of the amount maintained in savings.

If I need 13000 and I have 3000 in CU savings then I have two borrowing options.  

1. Borrow 10K from a Bank and withdraw 3K from CU.
2. Borrow 13K from CU and withdraw 0 from CU.

For option 1 I'd plug in 10K as the principle and repayments for 10K to calculate the APR and the total cost of credit etc.

For Option 2 I'd plug in 10K as the principle, but repayments for 13K.   This would give me a much higher APR for option 2.
But a more accurate one.

There are only 2 complicating factors. 
1. The interest earned on the money that is on deposit, which would have a tiny impact on the APR.

2. The fact that at the end of the CU loan you still have 3K in savings.   But this is the same as paying €3000 to the bank at 0% APR when the loan is paid off.  In other words, with the bank the repayments are lower, so you can save the €3000 and still come out ahead of the CU, because you never borrowed the €3000.

I really can't see any reason why CU's can't show that a customer with savings borrowing from them could save money by borrowing less and using their savings.

This isn't even complicated maths in economic terms.  It's a little beyond the back of an envelope stuff that Joe Soap does, but it's not rocket science for a large institution.

-Rd


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## rainyday (22 Dec 2004)

*Re: Value of quoted APR*

Hi RD - I'm guessing that Crugers point is that the formula for APR as laid down in the Act does not take savings into account, and for good or for bad, the CU's are restricted to use of the formula specified in the Act.


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## darag (23 Dec 2004)

*Re: Value of quoted APR*



> The formula quoted in the Consumer Credit Act 1995 will be used.
> It does not, and cannot, take account of any obligation to maintain an amount of "savings".


of course it can; the formula is very general.  give me a typical scenario (i.e. amount of savings, loan, repayments and their schedule, etc.) and i'll derive an apr figure according to the formula in the act for you.


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## crugers (26 Dec 2004)

*Re: Value of quoted APR*



> ...formula does not have a provision for taking "manditory savings" into account... (darag:29/3/04)


and​


> ...of course it can... (darag:22/12/04)


:rolleyes​
or​


> ...a fundamental point regarding apr. it is a totally scientific... (darag:31/3/04)


and​


> ...the formula is very general...(darag:22/12/04)


:rolleyes​
The forthcoming obligation for credit unions to quote the APR of loans above €200, using the Consumer Credit Act 1995 formula, on all credit union Credit Agreements, *WILL NOT* take into account the issue of "manditory savings".
The method of calculation prescribed for the formula in the Consumer Credit Act 1995, *DOES NOT* take into account the issue of "manditory savings".



> ...i'll derive an apr figure according to the formula in the act for you...(darag:22/12/04)



But, would it comply with the legal requirements of Section 37D of Part 14 of Schedule 3 of the Central Bank and Financial Services Authority of Ireland (CBFSAI) Act, 2004?
:\​


> ...the other problem is that the act doesn't fully address the rounding of time. i dunno whether the effect is significant in practise (although you could contrive situations) but it states that the time values be calculated as fractions of a year but it does not specify how fine grained the values be. i presume it doesn't oblige institutions to calculate interest on an hourly basis and yet you'd be annoyed if they calculated interest on a yearly basis. i think this should have been specified in the act. at the same time you want institutions to be allowed to treat monthly payments as occurring evenly 12 times a year (i.e. treat the time between payments as 365.35 / 12) and not force them to uselessly have to adjust for variation in the number of days in a month...(darag:25/9/04)


From what I have read, there will be an adjustment to the prescribed workings to address the issue of time. The solving for "i" will need to be assessed across various parameters, years, leap years, months (as 1/12th of 365 day years), weeks (as 1/7th of 52.1486 week year) etc....
But not to worry, sure we could always advertise "Typical APR's", round up or down when necessary, applicable or advantageous and hold our hands up to "genuine" mis-quotes, as per those bastions of Consumer Protection and well-being, the banks!
​


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## darag (28 Dec 2004)

*Re: Value of quoted APR*

your claim has changed to "will not" take into account manditory savings from "can not".  the formula certainly CAN take into account the manditory savings.  this is a fairly straighforward claim which i'm offering to prove if you provide a sample scenario.


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## crugers (28 Dec 2004)

*Re: Value of quoted APR*

I've no doubt that you could/would, can/will shoehorn the "mandatory savings" requirement into any formula to prove any/all claims, of which there are many!  

However, we are talking here about a legal obligation for CU's to conform to a standardised format for working out their loan APR's so that the consumer can, allegedly, compare value.

At present the formula and designated methods of calculation *cannot* take into account "mandatory savings". But you already knew that:


> ...formula does not have a provision for taking "mandatory savings" into account... (darag:29/3/04)


The present situation is that CU's will be required to calculate there APR's, without reference to savings, as set out in the relevant legislation. So it *will not* take into account "mandatory savings".
No flip-flop here....


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## darag (29 Dec 2004)

*Re: Value of quoted APR*

that quote predates my study of the formula and is incorrect.  there is no reason whatsoever that the formula CANNOT be used to calculate apr for credit unions.  i know plenty of reasons why it WILL NOT be used; the primary one is that credit unions will be exposed for offering very poor value to lenders in many cases.  what are the credit unions afraid of?


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## crugers (29 Dec 2004)

*Re: Value of quoted APR*



> ...there is no reason whatsoever that the formula CANNOT be used to calculate apr for credit unions...(darag:28/12/04)



I think you are missing something!

As and from the end of Q1 2005, all credit unions *MUST* use that formula, the one from the Consumer Credit Act 1995, to calculate their APR on all loans =>€200. The APR quote *MUST* form part of their credit agreement which is required for all loans =>€200.



> ...i know plenty of reasons why it WILL NOT be used...(darag:28/12/04)



I would be interested in hearing the other reasons since, as I said above, it will be a legal requirement for all CU's to quote APR and to calculate it using the CCAct formula.



> ...what are the credit unions afraid of...(darag:28/12/04)


From what I hear many are afraid of the formula, not the result, but the formula itself.
You can understand how unintelligible and intimidating the formula can be to voluntary, part-timers mostly without a background in "finance" or "actuarial" matters.


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## rainyday (30 Dec 2004)

*Re: Value of quoted APR*



> this is a fairly straighforward claim which i'm offering to prove if you provide a sample scenario


This is going round in circles. Crugers - Can you outline a sample loan scenario and let Darag present his approach to calculating an APR within the terms of the Act?


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## crugers (30 Dec 2004)

*Re: Value of quoted APR*



> ...Can you outline a sample loan scenario and let Darag present his approach to calculating an APR within the terms of the Act...(rainyday:29/12/04)



Here is one he "prepared" earlier!



> ...example, you and your spouse were both members of different credit unions and between you needed six grand to buy a car; your union offered you eight grand at a rate of 8% if you put two on deposit earning 2% while your spouse was offered nine grand at a rate of 7% but had to keep three on deposit earning 2.5%. which would you go for...(darag :26/3/04)


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## darag (4 Jan 2005)

*Re: Value of quoted APR*

sorry about the delay responding, i've been away for a few days.  here's an example of using the formula in the act which includes the mandatory savings element.

e.g. you need three grand for something so you go to the credit union.  you end up borrowing four grand while being told you must maintain one grand in savings.  lets say that the borrowing interest rate is 8% and that savings pay 3%.

i'll make things unreasonably simple for myself by assuming that the loan is to be paid back in a year through a series of quarterly (every three months) payments while the interest on the savings accrues at the end of the year.  however, there's no problem handling more frequent payments or longer periods or whatnot.

therefore we have the following series of events:
at the start - cu transfers 4000 to the borrower and borrower transfers (or commits) 1000 to the credit union
after .25 of a year - borrower repays 1049
after .5 of a year - borrower repays 1049
after .75 of a year - borrower repays 1049
at the end of the year - borrower repays final 1049 and borrower gets access to 1030 (his savings + interest)


to find the apr in this situation we stick the above numbers in to the formula given in schedule 4 of the 1995 consumer credit act which gives us the following equation:

  4000/(i+1)^0 + 1030/(i+1)^1
= 1000/(i+1)^0 + 1049/(i+1)^.25 + 1049/(i+1)^.5 + 1049/(i+1)^.75 + 1049/(i+1)

("^" represents "to the power of")

it'd be tricky to solve this using algebra so i just stuck it into excel and solved it using successive approximations;  i stopped at four decimal places which gave an apr of 11.36% which is a bit above what would have been advertised as an 8% borrowing rate.

if the maths seems too scary, cruger, i offer my services to write some windows software to do the above calculation under more general conditions.  i'd license it to the credit unions for a small sum - say 100 euro per union.


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## crugers (8 Jan 2005)

*Re: Value of quoted APR*

Hi darag
While I follow your creative application of the formula, I question how you interpret the "saving" element.
The CCAct defines the formula as:


> THE BASIC EQUATION EXPRESSING THE EQUIVALENCE OF LOANS ON THE ONE HAND, AND REPAYMENTS AND CHARGES ON THE OTHER



The "savings" element is neither, loan, repayment or charge.

The "savings" *will not* be included in the calculation of CU Credit Agreement APR required by the amended legislation.


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## darag (11 Jan 2005)

*Re: Value of quoted APR*

fair enough crugers; moving on from the argument about whether the formula CANNOT be used (it can) and i accept that it WILL NOT be used, then what do you think about the whether it SHOULD be used?

there's nothing creative about my use of he formula really. the beauty of the formula is that it doesn't care what terms you use to describe the flows of money to and from the institution.  money is money; if, under the lending agreement with the institution, i'm obliged to transfer money to them, it goes into the right hand side of the formula and if the institution is obliged to transfer money to me it goes into the left hand side.

for example,  consider this agreement with your credit union: a 4000 loan for a year at 10% with quarterly payments backed up by 1000 in mandatory savings at 3%.  let's look at what happens in such a situation:
1) cu gives you 4000, you give them 1000; this is COMPLETELY equivalent to the cu giving you 3000.
2) after 3 months you pay 1061
3) after 6 months you pay 1061
4) after 9 months you pay 1061
5) after 12 months you pay 1061 (clearing your loan) and collect 1030 savings; this is COMPLETELY equivalent to you paying the credit union 31 euro.
the bottom line is that your agreement with the credit union is COMPLETELY equivalent to borrowing 3000 and paying it off with a series of payments of 1061, 1061, 1061 and 31 every three months.  

unfortunately if you went to a bank and asked to arrange a loan on that basis they'd be obliged by the act to tell you that you were being charged 14.7% apr while the credit union will be able to tell you that you're borrowing at 10% even though the arrangements would be COMPLETELY EQUIVALENT.  i think this is bad for consumers by making it difficult for them to compare the cost of credit and it's somewhat disingenuous on the part of the credit union movement.

take another example, you need 3000 and get it by borrowing 4000 at 12% from the credit union while leaving 1000 in savings earning 3%.  unless this was to be paid off within 4 months, you'd actually save yourself money by putting the 3000 on your credit card as the real apr is over 19%.


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## Brendan Burgess (12 Jan 2005)

I haven't checked out this legislation, but if Credit Unions and other lenders are forbidden from showing the true cost of borrowing to their customers, then the Credit Unions and others should make a submission to the review of Irish legislation. 

It is outrageous that Credit Unions must mislead their customers by law. I don't know why banks don't insist on mandatory savings if they don't have to quote the true cost of borrowing. I suspect it is because IFSRA would probably ban it immediately. 

Brendan


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