the value of apr.

[darag]

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]

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]

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]

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]

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 somemight 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]

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]

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 7.70% which is not 7.73%

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 7.72

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]

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]

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]

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]

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]

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]

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.

 

[sfag]

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 ???

 

[crugers]

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”!

 

[rainyday]

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?

 

[daltonr]

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

 

[rainyday]

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.

 

[darag]

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.

 

[crugers]

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!

​