One pound from one lender is as good as one pound from another. So when you are shopping for a loan, the key issue becomes interest rates.
Could some be cheating by promoting a lower APR than the rate they are eligible for? The commercial success of promotion can be hugely improved with a really low APR. We think some should be tempted, right?
But who is to verify that the OPP is calculated correctly?
In one survey, 92% of all borrowed ads that were checked, an APR typically. (You will find below, a detailed explanation of what APR actually means, including its variants). The APR typically means that at least 66% of applicants are approved for a loan offered that APR rate or cheaper. None included that two-thirds would have been offered a higher rate than the stated APR typically.
The problem is that no independent body controls these numbers. So the system is open to cheating. The Office of Fair Trading (OFT) regulates the sale of personal loans, but even they admit that their resources are overstretched and they only control on a reactive basis.
We think it is administrative to speak for almost never!
The influential trade magazine Moneyfacts has twice raised the same concerns with the OFT asking them what checks are being carried out at the AOP quoted by lenders. After all, lenders can get to the top of the magazine’s Best-Buy tables with a low APR and gain significant amounts of business as a result.
Understanding the OPP
APR is an abbreviation for “annual percentage rate”. It illustrates the true cost of the money borrowed on loans, mortgages, and credit cards. And by law, consumers must have that information.
The APR calculation takes into account the basic interest rate, any initial fees when the interest is charged (ie daily, weekly, monthly or yearly) and any other costs you have to pay. Since all lenders are legally required to calculate APR in the same way, it should allow consumers to make meaningful cost comparisons between lending products.
So, if one financial company offers you a 5.6% loan plus an application fee of $ 100 and another offers you an interest rate of 5.8% without fees, then a comparison of the OPP figures will show which of the loans is the cheapest.
When you see the APR with the word variable written after it, it means that the interest rate may vary while you are repaying the loan — the interest rate is not fixed.
This variant is used in 92% of all loan advertisements
This means that the advertiser may not be specific about the interest rate applicants will be offered as their rates vary, usually in response to the applicant’s personal credit ratings and the amount they wish to borrow.
Therefore, the OPP variable is typically used to give the public a general impression of the interest rates currently offered by this lender. The addition of the word typically means that at least 66% of applicants who are approved for a loan are offered this rate or cheaper. So, once a loan offer is confirmed, the paperwork will reveal the actual APR or APR variable actually being offered.
Don’t forget that the word variable in the description also means that the interest rate is not fixed and may vary from time to time, going up or down.
This is the same as the APR variable typically except that the interest rate is not variable – it is fixed for the term of the loan.