the value of apr.

[darag]

Re: Value of quoted APR

your claim has changed to "will not" take into account manditory savings from "can not". the formula certainly CAN take into account the manditory savings. this is a fairly straighforward claim which i'm offering to prove if you provide a sample scenario.

 

[crugers]

Re: Value of quoted APR

I've no doubt that you could/would, can/will shoehorn the "mandatory savings" requirement into any formula to prove any/all claims, of which there are many!

However, we are talking here about a legal obligation for CU's to conform to a standardised format for working out their loan APR's so that the consumer can, allegedly, compare value.

At present the formula and designated methods of calculation cannot take into account "mandatory savings". But you already knew that:

...formula does not have a provision for taking "mandatory savings" into account... (darag:29/3/04)

The present situation is that CU's will be required to calculate there APR's, without reference to savings, as set out in the relevant legislation. So it will not take into account "mandatory savings".
No flip-flop here....

 

[darag]

Re: Value of quoted APR

that quote predates my study of the formula and is incorrect. there is no reason whatsoever that the formula CANNOT be used to calculate apr for credit unions. i know plenty of reasons why it WILL NOT be used; the primary one is that credit unions will be exposed for offering very poor value to lenders in many cases. what are the credit unions afraid of?

 

[crugers]

Re: Value of quoted APR

...there is no reason whatsoever that the formula CANNOT be used to calculate apr for credit unions...(darag:28/12/04)

I think you are missing something!

As and from the end of Q1 2005, all credit unions MUST use that formula, the one from the Consumer Credit Act 1995, to calculate their APR on all loans =>€200. The APR quote MUST form part of their credit agreement which is required for all loans =>€200.

...i know plenty of reasons why it WILL NOT be used...(darag:28/12/04)

I would be interested in hearing the other reasons since, as I said above, it will be a legal requirement for all CU's to quote APR and to calculate it using the CCAct formula.

...what are the credit unions afraid of...(darag:28/12/04)

From what I hear many are afraid of the formula, not the result, but the formula itself.
You can understand how unintelligible and intimidating the formula can be to voluntary, part-timers mostly without a background in "finance" or "actuarial" matters.

 

[rainyday]

Re: Value of quoted APR

this is a fairly straighforward claim which i'm offering to prove if you provide a sample scenario

This is going round in circles. Crugers - Can you outline a sample loan scenario and let Darag present his approach to calculating an APR within the terms of the Act?

 

[crugers]

Re: Value of quoted APR

...Can you outline a sample loan scenario and let Darag present his approach to calculating an APR within the terms of the Act...(rainyday:29/12/04)

Here is one he "prepared" earlier!

...example, you and your spouse were both members of different credit unions and between you needed six grand to buy a car; your union offered you eight grand at a rate of 8% if you put two on deposit earning 2% while your spouse was offered nine grand at a rate of 7% but had to keep three on deposit earning 2.5%. which would you go for...(darag :26/3/04)

 

[darag]

Re: Value of quoted APR

sorry about the delay responding, i've been away for a few days. here's an example of using the formula in the act which includes the mandatory savings element.

e.g. you need three grand for something so you go to the credit union. you end up borrowing four grand while being told you must maintain one grand in savings. lets say that the borrowing interest rate is 8% and that savings pay 3%.

i'll make things unreasonably simple for myself by assuming that the loan is to be paid back in a year through a series of quarterly (every three months) payments while the interest on the savings accrues at the end of the year. however, there's no problem handling more frequent payments or longer periods or whatnot.

therefore we have the following series of events:
at the start - cu transfers 4000 to the borrower and borrower transfers (or commits) 1000 to the credit union
after .25 of a year - borrower repays 1049
after .5 of a year - borrower repays 1049
after .75 of a year - borrower repays 1049
at the end of the year - borrower repays final 1049 and borrower gets access to 1030 (his savings + interest)


to find the apr in this situation we stick the above numbers in to the formula given in schedule 4 of the 1995 consumer credit act which gives us the following equation:

4000/(i+1)^0 + 1030/(i+1)^1
= 1000/(i+1)^0 + 1049/(i+1)^.25 + 1049/(i+1)^.5 + 1049/(i+1)^.75 + 1049/(i+1)

("^" represents "to the power of")

it'd be tricky to solve this using algebra so i just stuck it into excel and solved it using successive approximations; i stopped at four decimal places which gave an apr of 11.36% which is a bit above what would have been advertised as an 8% borrowing rate.

if the maths seems too scary, cruger, i offer my services to write some windows software to do the above calculation under more general conditions. i'd license it to the credit unions for a small sum - say 100 euro per union.

 

[crugers]

Re: Value of quoted APR

Hi darag
While I follow your creative application of the formula, I question how you interpret the "saving" element.
The CCAct defines the formula as:

THE BASIC EQUATION EXPRESSING THE EQUIVALENCE OF LOANS ON THE ONE HAND, AND REPAYMENTS AND CHARGES ON THE OTHER

The "savings" element is neither, loan, repayment or charge.

The "savings" will not be included in the calculation of CU Credit Agreement APR required by the amended legislation.

 

[darag]

Re: Value of quoted APR

fair enough crugers; moving on from the argument about whether the formula CANNOT be used (it can) and i accept that it WILL NOT be used, then what do you think about the whether it SHOULD be used?

there's nothing creative about my use of he formula really. the beauty of the formula is that it doesn't care what terms you use to describe the flows of money to and from the institution. money is money; if, under the lending agreement with the institution, i'm obliged to transfer money to them, it goes into the right hand side of the formula and if the institution is obliged to transfer money to me it goes into the left hand side.

for example, consider this agreement with your credit union: a 4000 loan for a year at 10% with quarterly payments backed up by 1000 in mandatory savings at 3%. let's look at what happens in such a situation:
1) cu gives you 4000, you give them 1000; this is COMPLETELY equivalent to the cu giving you 3000.
2) after 3 months you pay 1061
3) after 6 months you pay 1061
4) after 9 months you pay 1061
5) after 12 months you pay 1061 (clearing your loan) and collect 1030 savings; this is COMPLETELY equivalent to you paying the credit union 31 euro.
the bottom line is that your agreement with the credit union is COMPLETELY equivalent to borrowing 3000 and paying it off with a series of payments of 1061, 1061, 1061 and 31 every three months.

unfortunately if you went to a bank and asked to arrange a loan on that basis they'd be obliged by the act to tell you that you were being charged 14.7% apr while the credit union will be able to tell you that you're borrowing at 10% even though the arrangements would be COMPLETELY EQUIVALENT. i think this is bad for consumers by making it difficult for them to compare the cost of credit and it's somewhat disingenuous on the part of the credit union movement.

take another example, you need 3000 and get it by borrowing 4000 at 12% from the credit union while leaving 1000 in savings earning 3%. unless this was to be paid off within 4 months, you'd actually save yourself money by putting the 3000 on your credit card as the real apr is over 19%.

 

[Brendan Burgess]

I haven't checked out this legislation, but if Credit Unions and other lenders are forbidden from showing the true cost of borrowing to their customers, then the Credit Unions and others should make a submission to the review of Irish legislation.

It is outrageous that Credit Unions must mislead their customers by law. I don't know why banks don't insist on mandatory savings if they don't have to quote the true cost of borrowing. I suspect it is because IFSRA would probably ban it immediately.

Brendan