Writen by Nigel Bassett
What does 'Typical' APR mean and does it help consumers?
Nowadays it is very rare to see an advertisement for a loan without seeing a 'typical' APR. Some people know what APR stands (although alarmingly many do not – if you are one of them it stands for Annual Percentage Rate and is meant to reflect the cost of the loan in interest terms) but very few properly understand what the 'typical' bit means, where it comes from and more importantly whether it helps them as consumers.
Firstly let me explain what is actually means. Wherever you see the word typical next to an APR it means that the provider has to give that rate to at least 66% of the people that apply for the product. It sounds simple and straightforward but in reality isn't for a number of reasons.
It is used by lenders who employ a system called risk based pricing. This effectively means that they look at each individual applicant and assess their own personal circumstances and credit history before deciding what interest rate to offer them. If they think you represent a good risk they will offer you a good rate, if they think you are a bad risk you will probably get offered a higher rate, if you are offered a loan at all!
This means that without something like the typical rate APR they would not be able to advertise any rates, and you would not know which company to approach, so in that sense it has to be a good thing.
However apart from the obvious flaw of not knowing what rate you will get until you apply, there is another more serious flaw. Before deciding what rate to offer you they will undertake a credit check, which you would reasonably expect them to do if they are to assess you as an individual. The problem is that doing this leaves what is known as a credit footprint on your record and other lenders will be able to see that someone has done a credit check on you, and the real kick in the teeth is that if you have too many of these on your record you are likely to get refused for having them as lenders will think you are applying for credit all over the place.
So in a nutshell you do not know what rate you will get until you apply and applying may mean you can't get credit at all!
This situation is supposed to be part addressed by the fact that by law they HAVE to give the rate to 66% of applicants but what about the other 34%? Also, the rules around the 66% are flawed as technically it has to be to 'people that apply to that advert'. How do you accurately track applicants from individual adverts?
In my view lenders should be compelled to issue information about how many people in reality they gave their stated 'typical' rate to, which they are not. This is an important piece of information that consumers should be able to use when making a choice. There is even some evidence to suggest that not all lenders are hitting the 66% target.
There is also, in my opinion anyway, one other thing that needs to happen to help address this ridiculous situation, which is for the lenders and the credit reference agencies (who are the companies that hold all the data that enables them to do a credit check) to find a way to look at your record without leaving a credit footprint. That way it makes no difference how many times you apply.
The industry will argue that this plays into the hands of people looking to defraud them by making multiple applications but there must be better ways to deal with this.
So what do you do if you are looking for a loan and faced with this dilemma? Well at the moment, sadly, there is very little you can do. It is important though to understand your credit history. You can do this by contacting either Experian or Equifax who are the 2 main agencies. If you have a history of credit problems, or have even only missed one payment in the past, it is probably better to be realistic before starting the process i.e. accept that you are unlikely to get the quoted rate.
This article was written by Nigel Bassett from myloanchoices. http://www.myloanchoices.co.uk/Secured-Homeowner-Loans.html
Nigel Bassett has spent 17 years working in financial services within the UK, covering many disciplines and product lines. In the last 5 years he has focused on online marketing and has been involved in a number of the leading personal finance websites.
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