Is the APR a con?

[pelham9]

No -but it can be used so.

 

We are allowing banks to con us, as usual aided and abetted by the OFT

 

I say this because the APR is not as we are led to believe a true interest rate. If it were so we would be able to use it to calculate interest that we have been charged. It cannot be used for this purpose because

 

a) if there are compulsory costs other than interest these must be included in the APR. What then is the rate of interest to be applied?

 

b) if there are no costs it is allowed to be shown to one decimal place and this is not accurate enough to calculate interest. Banks invariably charge a true rate up to .049999..% above the %APR quoted.

 

When where and for what purpose was the %APR first invented and published? Perhaps some lawyers can point me to the answer.

 

My research suggests to me that the %APR is an advertising term and it was never meant to be used as a true ' interest rate to be applied'. Surely our legislators would want consumers to know this true rate so that we can check the interest charged for our loans. %APR in later advertising regulations is allowed to be shown 0.1 below and 1 (A whole 1 !!) above the true annual rate (regs 1983 and 1989.) and this makes %APR as a representation of the truth a complete nonsense.

 

We are NEVER (or hardly ever) charged the APR on our loans.

 

Anybody especially lawyers please comment.

 

It is a shame that this entity was ever termed the Annual Percentage Rate as this is misleading. It should have been named the Totla Cost of Borrowing (%TBR) because we have to invent an Actual Annual Rate (AAR) to get at the truth.

[car2403]

The APR is not an advertising term - it's implementation was designed to allow punters to compare loans "like for like" to find the cheapest one.

 

Tolerance in APR comes from the 1983 agreement regulations (Consumer Credit (Agreement) Regulations 1553/1983) amended by the 2004 Regulations.

 

This is from the OFT's FAQ Document on these regs;

 

 

Quote:

3.69 Is there any leeway in calculating APRs?

Sch 7 para 1A provides for permissible tolerances in disclosure of the APR in a credit agreement. The document may show a rate which exceeds the APR by not more than one unit, or which falls short of the APR by not more than 0.1 units.

There are also permissible tolerances in cases where repayments are nearly equal, or where the period before the first repayment is greater than the interval between each subsequent repayment

[gh2008]

One of the problems is that APR is quoted as "annual percentage rate" which is not really true.

Apr should be referred to a the "Annual percentage rate of charge" so you can see why it was shortened.

 

But no, it was never intended to be used to calculate the interest added to an account.

[pelham9]

Car 2403

 

I have read & reread the 1983 regulations and I think the OFT's publication you quote is either incorrect or we are misinterpreting it. I think it is incorrect!!

 

They say the regulations (Sch 7 para 1A) provides for permissible tolerances in disclosure of the APR in a credit agreement. This is not what the regulations actually say.

 

 

Sch 7 Para 1A

 

For the purposes of these Regulations, it shall be sufficient compliance with the requirement to show the APR if there is

included in the document--

(1) a rate which exceed the APR by not more than one; or

(2) a rate which falls short of the APR by not more than 0.1

In the 1983 regulations the APR remains as defined in the Total Charge for Credt Regulations (1980) which allow ( I cannot understand why) a figure to one decimal place. This is a tolerance of -.05 to .049999...%. If it is disclosed it must be shown within these tolerances. There is no change in the permissable tolerances in disclosure of APR. When the APR is shown it must still be shown as defined in TCC (1983)

 

The 1983 regulations do require an APR to be disclosed in agreements in those circumstances where the 1974 Act stipulated ' the interewst rate to be applied'. This is a consumer benefit as it defines the method of calculation which the 1974 Act omitted - a serious fault.

 

All that Sch 7 Para 1A does is to say that the requirement to show the APR is satisfied ( sufficient compliance) if interest rates elsewhere in the document are within -.1 and 1% of the APR . In other words if the correct interest rate to be applied is shown and these are within these tolerances compared to the APR , the APR does not have to be shown.

 

The tolerances for disclosure of APR were not changed in the 1983 regulations.

[gh2008]

You know I think you are right there.

The 'leeway' is if another rate of interest is quoted that falls within those limits then the APR does not need to be quoted as well.

 

The APR, if quoted, should be accurately calculated and then displayed 'rounded down to 1 decimal place' (changed to rounded (properly) to 1 decimal place 14 April 2000)

[gh2008]

The tolerances for disclosure of APR were not changed in the 1983 regulations.

 

They were by the SI 1999/3177 though

[car2403]

They were by the SI 1999/3177 though

 

Which come into force on 14 April 2000.

 

The problem is, the regs are vague - if a Judge (or the other side) reads the FAQ from the OFT, that will be used as persuasive precedent, so you would need an argument against it.

[pelham9]

The APR in certain circumstances must be shown in agreements and clearly its use here is not for advertising. The 'advertising' term is %APR. They are both calculated in the same way and a tolerence to one decimal place is allowed.

 

As car2403 says APR was introduced to allow punters to compare the total cost of borrowing and as such it must be a pre-agreement entity. For this purpose a rounding to one decimal place is reasonable but is not truthful. How come this rounding was ever allowed? Anybody know?

 

But how can APR which is an approximation ever be suitable to be shown in agreements where exactitude is required. It suggests to me that our legislators have fallen into the trap that the APR is the interest rate to be applied as in the CCA (1974). Has bank propaganda reached them as well?

 

Sch 7 Para 1A makes little sense to me.

 

It is saying that where the APR is required to be shown it is sufficient compliance to show an interest rate no more 1% above or no less than .1% below the APR. If these tolerances are there the APR does not have to be shown! despite the fact that APR is a function of those interest rates

 

Let us suppose that the %APR (in advertising) is 17.9%. In an agreement the APR does not have to be shown if the actual interest rate is between 17.8% and 18.9%. but then of course the APRs would then be 17.8% and 18.9% so why the dispensation. Is it to give leeway to banks to charge monthly interest rates that are very much out of line with their advertised APRs?

 

I do not think that the banks would ever charge a monthly rate that equated to 17.8% per annum when they had got a customer willing to pay an APR of 17.9% . That is not the way of the banks so we can ignore the downside.

 

Up to now we are used to the banks quoting an APR that is .04999% (or as near as possible to that figure) below the actual rate they charge but what do these 1983 tolerances mean.

 

An APR of 17.9% can represent a monthly rate of between 1.378 and 1.385%. The banks will of course charge 1.385% monthly. However provided they do not show 17.9% APR in the agreement thay can now charge 1.453% monthly. If they do show an APR it would now be 18.9% by definition so they will not show it otherwise customers will complain.

 

It seems to me that 'truth in lending' stopped being an article of faith in 1983. Any comments?

 

My own feeling is that the banks hated the idea of 'truth in lending' as it took from them the many scams that they had habitually used. They got a small amount back with the APR rounding presumably lobbying that more than one decimal place would make their adverts untidy. They then concentrated on the myth that the APR was the actual interest that they charged. Very few people including lawyers and legislators I have talked to are now aware of the fact that the APR is never the rate actually charged so it seems they have succeeded. Now it seems that our legislators in the 1983 regulations have made things worse presumably in response to further bank lobbying.

[gh2008]

How come this rounding was ever allowed? Anybody know?

 

Have you seen the equation !!! it's ok in these days of PCs laptops PDAs etc. but, back when it was introduced they relied on books of tables and 'cheat sheets'

 

I have a very interesting article about APR dating from the 80's if you PM I will email it to you. It is very interesting and will answer many of your queries and also provide a few more

 

gh

[pelham9]

Yes I certainly have! It looks and is complicated but this is because it is a legal defintion ( which will not be understood lawyers!) and takes into account all the various variables that could possibly be devised by banks.

 

Fortunately it is too complicated for the banks also and they have settled for much simpler agreements without the complication of multiple charges variable payments and payment intervals which the formula caters for.

 

In general it is much easier to work from first principles with these simpler agreements and this is what I do. I am not a fan of Dualcalc as I cannot see their code and they seem to think you can check interest charged using the APR. Mathematically an approximation can only be used to get an approximate answer and this is just not good enough.

 

I still have no answer as to why the APR was ever allowed to be rounded to one decimal place when a simple review of the situation would have shown that two or three places are necessary for accuracy. The 1983 regulations on APR in agreements are a nonsense which makes me think that the drafters were ignorant of the definition of APR.

[gh2008]

I'm not sure that I agree with you there.

The purpose of quoting the APR was to make 'dodgy' loans more transparent. It was designed to allow consumers to see the true cost of borrowing. It has succeeded in that most of the, what would have been, multi 00%APR loans have gone (except doorstep loans admittedly)

 

now, as a customer, if the bank over declares the APR by upto 1% that's ok by me, as the actual loan would be slightly cheaper than they say. If they under-declare by 0.1% well, that's what they all try and do so you should be able to complare like with like.

 

They did tighten up on this in 2000, and now it has to be accurate to 1 decimal place.

 

What I still think is wrong is that on a running account credit agreement, it should not be used as the interest figure.

I will be using this argument myself if one of my 'agreements' comes to court.

 

More useful info here IanSharpe.com - Using Excel to explore Annual Percentage Rate (APR) (don't know whether I've posted it already)

[pelham9]

gh2008

 

I think we are in total agreement once I retract my final sentence.!

 

As far as I am aware the definition of APR has not changed since the Total Charge for Credit Regulations 1977. The method of calculation is precise but this curious rounding to one decimal place is allowed. ( I might say that I have not been able to find exactly when this apporoximation first appeared)

 

It is because

 

a) of the approximation allowed

 

b) the inclusion where relevant of charges other than interest in the APR

 

that APR can never be used to calculate interest charges and it is for this reason that it has no place in credit agreements except as a check that the lender is keeping to his quoted rate.

 

It should never be accepted as the 'interest rate to be applied' in a credit agreement simply because it is not and was never meant to be used in this way.

 

Its correct use is in quotations however made and advertisements so that borrowers can assess the cost of loans from various sources. This is a pre-agreement activity. In 'advertisements' lenders are allowed to quote a

%APR ( this is not the APR) whch is no more than 1% above the APR and no less than .1% below the APR. If they quote 1% above they will lose business and .1% below is hardly different to the .05% already allowed for APR and as they will all do this the comparison is not vitiated. This does not change the value of the APR which remains as defined.

 

So how can we explain its use in the 1983 regulations? I have read them carefully and I must apologise to the draftees for my momentary lack of faith!! These regulations do in fact reinforce the pre -agreement nature of APR and do not accept that APR defines the rate of interest to be applied in an agreement.

 

I interpret them to mean the following.

 

a. For all types of credit ageements the interest rate to be charged must be shown . (NB the term APR is not used here.) In the 1974 Act only running account credit had to show the interest rate. It now applies to all kinds of credit.

 

b. the method of application of this interest ie how it is calculated must be shown. A considerable improvement.

 

c. the APR must be shown except as in e. below as well as the interest rate to be applied as in a. above.

 

d. for running account credit the APR is to be calculated in a defined way. This is still within the definition of TCO 1973 but makes the calculation easier by defining certain parameters.

 

e. In all types of agreements the APR need not be shown unless the interest rate to be charged would result in an annual rate 1% above the APR or .1% below the APR.

 

This all now makes sense to me. The rate of interest to be charged must be shown and this is NOT THE APR. The quoted APR is only to be shown if the rate in the agreement is not within the quoted APR tolerances allowed in advertising or other method of quotation. So if an APR is quoted in an agreement beware!

 

The APR does not define the interest rate that will actually be charged on a loan so if an agreement only shows the APR it is unenforceable. In other words the APR cannot take the place of 'the interest rate to be applied'

[car2403]

The APR does not define the interest rate that will actually be charged on a loan so if an agreement only shows the APR it is unenforceable. In other words the APR cannot take the place of 'the interest rate to be applied'

 

This is the exact argument that I am using, here;

 

http://www.consumeractiongroup.co.uk/forum/data-protection-default-issues/110146-car2403-hfc-bank-default-11.html#post1426707

 

Amended defence;

 

The agreement provided has been improperly executed under s.61(1) Consumer Credit Act 1974, as the rate of interest of the loan is missing.

 

While the agreement states the annual percentage rate (APR) of the loan, the Defendant will make submissions showing that the APR is not a sufficient rate of interest to comply with the requirements of the Act or the subsequent regulations made under it, to which this agreement is subject.

 

Reg 6(1) of the Agreement Regulations 1983 provides that the terms specified in Sch 6 to the Agreements Regulations are ‘prescribed terms’ for the purposes of s61(1).

 

...

 

Any application for an Enforcement Order under s.65(1) of the Act, as a result of this improper execution under s.61(1) of the Act, must be dismissed by the Court by virtue of s.127(3) of the Act.

[pelham9]

As far as I am aware the point that the APR is not a rate that satisfies the requirement for an interest rate in a CCA agreement has not been used before in court. I think this is totally correct and have been saying so on these boards in many posts.

 

I think your arguments must be very clearly put because there is a fixed idea in 99.9% of people's minds that APR is the rate of interest that you will be charged. This applies to judges and it will be difficult to dislodge the prejudice.

 

Fortunately your case relies on many points of which this is only one. Best of luck in your fight.

[underdog13]

Just found this very interesting thread; after reading it I checked my bank loan from 2004 - only the APR is stated, no interest rate is alluded to at all, just the amount of interest (ie £1700) to be charged. If I have understood this correctly, it renders the agreement unenforceable?

 

A loan from the same bank taken out in 2006 states an APR and an annual interest rate - 0.35 difference. Now if the first document was correctly executed, why would they have made the adjusments to the later one.......

[ReasonableRon]

Just found this very interesting thread; after reading it I checked my bank loan from 2004 - only the APR is stated, no interest rate is alluded to at all, just the amount of interest (ie £1700) to be charged. If I have understood this correctly, it renders the agreement unenforceable?

 

A loan from the same bank taken out in 2006 states an APR and an annual interest rate - 0.35 difference. Now if the first document was correctly executed, why would they have made the adjusments to the later one.......

 

Because the 2004 CCA Agreement Regs (which came into force on 31/5/05) added for the first time the requirement to show the annual rate on the agreement.

[underdog13]

Ah, I see; Thanks for that reasonable Ron.

 

So the fact that the 2004 loan didn't state an interest rate, just an APR is meaningless and it is in fact enforceable, as it was taken out prior to 31st May 2005?

Edited December 7, 2008 by underdog13

[ReasonableRon]

Ah, I see; Thanks for that reasonable Ron.

 

So the fact that the 2004 loan didn't state an interest rate, just an APR is meaningless and it is in fact enforceable, as it was taken out prior to 31st May 2005?

Yep - that is correct.

 

Providing the APR is shown (together with the total interest charge and total amount payable in the case of a fixed rate agreement) on a Pre 31/5/05 agreement then it is not outside this particular aspect of the CCA.

[underdog13]

Just my luck:rolleyes: Thanks for your reply, ReasonableRon.