base interest rate vs APR

W

Woody

Guest
I repaid a loan some time ago - the loan agreement stated a base interest rate of 11% and an APR of 20.5%. The actual interest rate on the monthly reducing principle works out at something over 18% which includes charging this rate on the loan protection amount. Can this be correct?
 
The fundemental questions are as follows:

1 If APR and base interest conflict on an agreement which one applies legally?
2 Is it proper to charge interest on loan protection?
 
I'm afraid that you haven't given enough details.
Base interest rate doesn't really mean anything without a definition. It sould be in the loan contract. APR is a standardised rate used for comparing different types of loans. It may have been based on a variable rate when the loan was taken out so may change.
 
Thanks...

It was a fixed interest rate loan over 60 months. The amounts charged reflect the APR figure (20.5%) detailed on the agreement. The same agreement states the "flat interest rate" to be 11%. Clearly there is an error as the numbers are not consistent. My understanding is the APR is a derived figure to enable the customer make comparisons (although may be the value used for data entry on the bank's IT system) and should be based on an underlying basic interest rate + the other charges that might apply. Given the error, which of these figures take precedence? Secondly, are they correct in charging the same (exorbitant) interest on (already exorbitant) loan protection?
 
20.5% seems an exhorbitant (and probably illegal) APR to charge on a loan.

Are you sure it is not 4.1% (20.5%/5 years) APR.This would be a monthly repayment of about 1850 on a €100,000 initial principle. Were you seeing numbers like this?

If you were to pay this fixed rate over the 5 years of the loan, you would end up paying back about 111% of the original loan. This might e what the flat rate refers to.

I think it is quite likely that the 20.5% and 11% rates almost certainly refer to different things
 
Again, thanks - I appreciate your time on this..

After your original reply I found this:



Based on the loan amount (bumped up by the bank to include the loan protection), the period and the APR, the numbers calculated are in line with what was charged and equate to a flat rate of 18.7% or thereabouts which is pretty much what I calculated in Excel by trying various interest rates over the period. I have also made the same calculation on another loan from the same institution (coincidently also with a base rate of 11%) which worked out as expected with a more reasonable APR rate of 12.3%.

In stipulating a flat rate of 11% on the loan agreement they clearly made an error and I don't doubt that the higher rate was intended. Nevertheless, I have a signed agreement with both rates an not too many qualms about chasing them for the difference on this "gun to the head" punitive rate arrangement if there is any valid case to be made. I also think charging interest on loan protection is insult to injury but possibly standard practice?
 
How did you calcuate the 18.7%?

The relationship between flat rate and APR is dependant on the term of the loan.
 
I actually used 2 different methods. Firstly, using Excel, I used different rates in a formula to calculate interest and principle repaid over 60 months until the principle in month 60 was less than a month’s instalment.

I then used the calculator on

http://www.brookscity.com/common/calculators/loan.html

Principle (including 1047.92 loan protector) – 7647.92, APR – 20.5%, period – 60 months. The 2nd box calculates the flat rate based on this APR as 18.79%. Interestingly, the bank somehow managed to extract a further 0.05 over and above the calculated instalment every month.
 
Woody I can't believe you were charged 20.5% APR. I'm pretty sure it is illegalt to charge that much.
It must have been 4.1% APR over 5 years.

It also looks like your loan protection was charged up fromt and added to the loan value.

I make it, on a loan of 7647.92 and an APR or 4.1% over 5 years, they should have charged you a total of about €140.93 per month. As the length of each month changes, this might vary a small amount. Does this match up with what you were charged?
 
It was 197.57 (ties in more or less with what the previously mentioned calculator indicates for 20.5% apr) - if they calculate actual interest daily rather than monthly might account for the other slight 0.05 discrepency.

You've been very good / patient. I'll go back to the bank moaning about the conflict between the 2 rates, the charging interest on loan protection, the high rate etc. I'm assuming this will bring no joy so will follow up with the ombudsman. I don't really expect any benefit other than the pleasure of blowing off some steam :)
 
Of so it is actually an APR of 205%. An APR of 20.5% ties in with a repayment of around 197.57 (197.52 on my spreadsheet). That seems very high but I guess they charge those sorts of rates on credit cards.

If you multiply 197.52 by 60 (60 months) you get 11851.42. That's about 154.96% of the orginal loan. So I think that means an 11% annualized flat rate (55%/5).

So I think the rates are consistent and are not in conflict. I even think it might be ok to charge the loan protection amount up front.

Sure check with the ombudsman anyway to see what he says as I cannot be sure either way
 
[QUOTEWoody I can't believe you were charged 20.5% APR. I'm pretty sure it is illegalt to charge that much.][/QUOTE]

This is not correct, it is possible to charge any interest rate on a loan once you are regulated. (unregulated lending is illegal)
 
You need to carefully check your credit agreement, it may have a promissory note section which is the basis of your agreement, (eg loan, term, repayments, interest) whichever interest is quoted on the promissory note is what you've signed for, anything else may be just indications or loan information.
Also you should check if you opted for the payment protection to be included in the overall loan, this is not illegal but you'll have to read the policy documents to see if the policy goes down as the loan reduces (which you would expect)
Finally, if you think the credit agreement is fundamentally flawed then you could challenge it and take that risk. Or after careful examination write to the bank explaining how the document is flawed and see how they reply. Its very unlikely that it will be wrong because that could mean any loan written on that credit agreement is, however it may lead you to talking about a rate reduction.
 
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