Graham Hill Reveals The Truth About Misleading APR
Tuesday, 5. July 2011
I’m going to send out some training soon, much of which will address some important car finance issues. One of the main subjects is APR, what it is, how it works and why it’s a complete waste of time. I am on a mission to change the way we look at finance in the UK and why I think that it is important to change attitudes. To give a little taster APR is meant to include all fees and charges within the rate calculation but if a broker makes a charge as say a documentation fee it is generally excluded.
This isn’t the case with a financial services product. The commission has to be advised back to the lender who then factors in the commission due. So let me share an example.
You need to take out some HP on a car for £10,000 repayable over 36 months (paid monthly) and you are told by two brokers that they can provide the finance and both charge a documentation fee of £250.
You, like any other consumer/small business in the world, is obsessed with APR, you must get the best deal. Provider A quotes you an APR of 11% whilst provider B quotes a rate of 11.8%. You have the same fee to pay but in the first instance you are to make the fee of £250 payable to the lender, let’s say it’s Lombard (I just used that name).
This payment is therefore included in the APR calculation. However, in the second example with the lower APR of 11% the fee is made payable to the broker, so he collects the fee and in fact charges more per month.
In the first example where the APR is 11.8% the monthly repayments are £320 however the lower 11.0% APR produces repayments of £325 per month. It’s quite clear that this all needs to change as well as attitudes towards finance. We are all using the wrong benchmarks but more of that in my training. By Graham Hill
