Jargon Busters - Rates
Flat Rate
Our Industry has always used a flat rate when
quoting/doing business. In short, a flat rate is a fixed rate that is applied
to the amount being borrowed for each year of the agreement. For instance a Borrowed
Sum of £1000 with a Flat Rate of 10%
(not the usual rate of doing business with us but a nice rate to demonstrate
the maths) borrowed over 12 months would make the interest £100, and if you had
borrowed over 24, the interest would be £200 and so on.
True Rate
Many of you will know the term 'true rate'. This
is the rate of interest applied to the amount being borrowed but expressed as
if charged on the reducing balance. A flat rate of 10% over 36 months would
make for a true rate of 17.92%! - Makes you think doesn't it, at first glance
you would be forgiven for thinking that the flat rate was the better deal.
APR
This is the Annual Percentage Rate introduced as
part of the consumer credit act which attempts to make rate comparison simple
in that it takes into account any charges including document fees and option
fees and expresses them as a true rate. For instance adding just a £50 document
fee to the above examples (bearing in mind that the average charged is nearer
£150) to the maths makes for an APR of 23.89%!
Final thoughts
- check
that the loan amount being offered is the same
- check
the fees
- ask when
the payments begin, you would be amazed at the effect on rate of paying a
month or more on signing has, in short you are borrowing less and over a
shorter period if comparing to a quote based on the 1st payment being one
month after signing!
- check
the total payable
- and yes
check the APR if within the Consumer Credit Act