APR & flat rate. Wots the difference?
26 November 2002, 08:11 AM
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APR - Annual Percentage Rate.
The idea of the APR is supposed to make the issue clearer for the consumer. (Albeit, that I don't think it does) The reason being that there are two main ways of charging interest - the Flat rate and a compound rate.
I think I am right in saying that flat rate is calculated as a % of the balance over a given period (say a year), whereas compound interest is charged on a daily basis on the balance each and every day. (Only ever using one way - compounded, I don't know a huge amount about Flat rates). Also, the way in which fees, if any, are charged will affect the APR
So, the answer is look at the APR for a feel of what is more competitive. The other idea, if it is a loan you are talking about, is to simply look at how many payments and how much each one is - that will give you a simpler way of comparing how much you are paying back, and therefore which is the cheaper.
Also, make sure you are comparing like with like - check on penalties etc etc, albeit I don't think that they are allowed under the Consumer Credit Act. If Cahoot are quoting 7%, and this is NOT the APR, they must also quote the APR at some point, as required under the CCA.
Hope this helps
Matt
The idea of the APR is supposed to make the issue clearer for the consumer. (Albeit, that I don't think it does) The reason being that there are two main ways of charging interest - the Flat rate and a compound rate.
I think I am right in saying that flat rate is calculated as a % of the balance over a given period (say a year), whereas compound interest is charged on a daily basis on the balance each and every day. (Only ever using one way - compounded, I don't know a huge amount about Flat rates). Also, the way in which fees, if any, are charged will affect the APR
So, the answer is look at the APR for a feel of what is more competitive. The other idea, if it is a loan you are talking about, is to simply look at how many payments and how much each one is - that will give you a simpler way of comparing how much you are paying back, and therefore which is the cheaper.
Also, make sure you are comparing like with like - check on penalties etc etc, albeit I don't think that they are allowed under the Consumer Credit Act. If Cahoot are quoting 7%, and this is NOT the APR, they must also quote the APR at some point, as required under the CCA.
Hope this helps
Matt
26 November 2002, 08:18 AM
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So for example: a £8500 loan at 7% APR for 3 years is then:
£8500*1.07^3 = £10412 total paid back
over 36 months = £289.24 per month.
Well that didnt work as Cahoot are quoting 7% APR on £8500 for 3 years as being £261.62 per month!
I dont understand. I guess I should go for the lowest monthly payment!
[Edited by matt.bowey - 11/26/2002 8:21:42 AM]
£8500*1.07^3 = £10412 total paid back
over 36 months = £289.24 per month.
Well that didnt work as Cahoot are quoting 7% APR on £8500 for 3 years as being £261.62 per month!
I dont understand. I guess I should go for the lowest monthly payment!
[Edited by matt.bowey - 11/26/2002 8:21:42 AM]
26 November 2002, 09:10 AM
#4
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APR is a bit like Torque - everyone knows sort of what it is, but cant explain it technically.
With APR AFAIK, the interest is chrarged on what you owe each time you pay some off. Hence after your first payment, the interest for the next month is reduced, etc etc
With APR AFAIK, the interest is chrarged on what you owe each time you pay some off. Hence after your first payment, the interest for the next month is reduced, etc etc
26 November 2002, 09:39 AM
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Flat Rate - say you borrow £100 from me and I charge you £10 in interest over the repayment period. That's a flat rate of 10%.
APR - Say you spend £1000 on your credit card. The first month you pay a set amount of interest on the £1000 balance. You may then pay £250 of the balance, so the following month although you're charged the same interest, the amount actually charged is reduced (since the balance has reduced).
The APR is supposed to be the true cost of the loan and includes any fees, charges and changes in interest over the load period.
The APR is very confusing as the calculation can vary with each lender. The lowest APR is not always the best (but should be in most cases)
Have a look on the DTI for their explanation.
Personally, for any loan I always find out how much I repay each month, for how long and what (if any) charges there are. That way I can simply work out how much I pay in total, and find out exactly whose cheapest.
As for credit cards, you're best asking how much interest is charge each month (i.e. 1.002% or whatever). Then you can see who is the cheapest lender.
Stefan
[Edited by ozzy - 11/26/2002 9:40:08 AM]
APR - Say you spend £1000 on your credit card. The first month you pay a set amount of interest on the £1000 balance. You may then pay £250 of the balance, so the following month although you're charged the same interest, the amount actually charged is reduced (since the balance has reduced).
The APR is supposed to be the true cost of the loan and includes any fees, charges and changes in interest over the load period.
The APR is very confusing as the calculation can vary with each lender. The lowest APR is not always the best (but should be in most cases)
Have a look on the DTI for their explanation.
Personally, for any loan I always find out how much I repay each month, for how long and what (if any) charges there are. That way I can simply work out how much I pay in total, and find out exactly whose cheapest.
As for credit cards, you're best asking how much interest is charge each month (i.e. 1.002% or whatever). Then you can see who is the cheapest lender.
Stefan
[Edited by ozzy - 11/26/2002 9:40:08 AM]
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