G. Annual Percentage Rate (APR) and Annual Percentage Rate of Charge (APRC) PDF

Terms for subsection: G. Annual Percentage Rate (APR) and Annual Percentage Rate of Charge (APRC) Term: 01. Annual Percentage Rate (APR) Annual Percentage Rate (APR) The APR is interest rate on loan using standard formula set by the Government Purpose of APR is to enable customers to compare differe...

Terms for subsection: G. Annual Percentage Rate (APR) and Annual Percentage Rate of Charge (APRC) Term: 01. Annual Percentage Rate (APR) Annual Percentage Rate (APR) The APR is interest rate on loan using standard formula set by the Government Purpose of APR is to enable customers to compare different products in the market So costs are assessed against the same benchmark APR first introduced by Consumer Credit Act 1974 Must be quoted in advertisements and illustrations for lending products Only exception to this rule is for ‘simple credit advertisements’ Aimed at promoting a brand as opposed to product MCOB rules have a specific section on APR Setting out minimum requirements for regulated mortgage contracts and regulated lifetime mortgages APR must be quoted to one decimal place Must be at least as prominent as any ‘headline’ rate used by lender APR calculated with reference to total charge for credit (TCC) Not all borrowing costs included As a general rule APR includes interest charge and costs of setting up a loan Setting up costs include: Legal fees connected with mortgage Not those connected with property purchase Survey/valuation fee Booking/admin fee Higher lending charge Buildings insurance arranged through the lender, if a requirement of a specific mortgage deal Except the standard redemption fee charged at the end of the mortgage term any costs/fees/charges after completion are excluded Such as: Late payment charges Insurance premiums Life insurance or buildings and contents insurance (unless buildings insurance is a specific requirement of a particular mortgage deal) Arrears charges Early repayment charges and clawbacks Another variable affecting APR is method of calculating interest Two methods used by lenders Annual rest Daily rest Once the TCC has been calculated it is then converted into an annual percentage rate Recommended Reading: APR FCA (MCOB10.3) - Formula and assumptions to calculate APR Investopedia – Annual Percentage Rate (APR ) Consumer Credit Act 1974 Go Compare - The Consumer Credit Act 1974 Compact Law - Consumer Credit Act 1974 - your rights Which? - Consumer Credit Act APR vs flat rate Money Saving Expert - Interest rates explained Barclays - APR Investopedia – APR vs Interest Rate Term: 02. Annual Percentage Rate of Charge (APRC) Annual Percentage Rate of Charge (APRC) From April 2016 APR is used in respect of: Personal loans Credit cards Hire purchase agreements APRC is used for mortgages and second charge loans The annual percentage rate of charge (APRC) Introduced by Mortgage Credit Directive (MCD) Similar to APR Formula to calculate detailed in MCD The total amount of interest applied to a mortgage product on an annual basis as a percentage of the total amount borrowed Includes all additional expenses and discounts and takes account of how much time remains on mortgage To give full average cost of borrowing per year Little difference in rates produced by APR and APR calculations APRC assumptions are a little less definitive than those for APR Such as treatment of costs for mortgage and insurances Second APRC (APRC 2) MCD introduced a requirement to provide an additional means of comparison, APRC 2 (or second APRC) If rate is capped then APRC 2 calculated on basis that the interest rate rises to highest level at earliest opportunity When rate is not capped the APRC 2 calculated on basis of lender’s highest borrowing rate for that product over last 20 years There is some concern that APRC 2 will create confusion amongst borrowers and complicate decision making It can also be difficult to provide relevant figures as certain products (such as base rate trackers) did not exist 20 years ago