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Further to yesterday’s article on Typical APRs, today’s related article covers another oft-used tool in loan advertisments, the ‘from’ rate.

With lenders being a little restricted in the keen-ness of typical rate advertised due to the 67% qualification rule, the obvious solution is to tell potential applicants what their best rate is, hence the frequently seen phrase ‘rates from 5.9% APR’ etc, and when you see such a statement on an advertisement it seems pretty straightforward and obvious what that means - ‘this is our lowest rate’, although most savvy consumers will realise that this rate is probably reserved for applicants who represent the lowest risk.

Bizarrely however, the regulations on credit advertising dictate that a ‘from’ rate must be no lower than that which at least 10% of applicants responding to the advert will be offered.

What this means is that a lender may have a true lowest APR of e.g. 5.4%, but if less than 10% of applicants qualify to be offered this rate then the lender cannot legally state it in their advertising, being forced instead to quote a higher rate - one which at least 10% of applicants will be offered, as their ‘from APR’ - e.g. 5.9%.

This is a rule which surely frustrates any credit advertiser in such a competetive market where the top differentiator with which advertisers compete for the consumer’s attention is rate. To have a market leading rate, but be prevented from advertising it is a complete anathema to lenders, leading to a dilemma where a choice must be made; does the advertiser
a) bite the bullet and advertise a ‘from’ rate that is higher than it’s true lowest rate, but is the lowest rate that 10% of applicants qualify for.
b) ensure a 10% catchment of this rate, either by using a bottom rate slightly higher than it could be, or by keeping it super-low but extending it to slightly more risky applicants in order to reach the 10% threshold.
c) just advertise the lowest rate available irrespective of the 10% qualification rule.

in scenario a) the advertiser complies with the regulations, but is competetivley disadvantaging itself by doing so.
in scenario b) the advertiser is again compliant but must either disadvantage iteslf competetively or increase it’s risk at the low-rate end of the market, and increase which must be compensated for elsewhere at the expense of higher risk borrowers paying even higher rates.
in scenario c) the advertiser chooses to neither relinquish the competetive edge of the lowest rate nor to increase risk by offering the lowest rate to applicants who do not strictly qualify for it, instead deciding to flout the regulations and risk the consequences.

This is of course just food for thought, and there’s no suggestion that any credit advertiser is currently considering or undertaking any such thought process or advertising strategy, but considering the possibilities above to manipulate the credit advertising regulations you might wonder to yourself whenever you see a ‘from’ rate quoted in a credit advertisement, ‘what is this advertiser really saying to me?’

a) this is the lowest rate available and more than 10% of applicants qualify for it so we can state it in our ads.
b) there is a lower rate available, but since less than 10% of applicants qualify we cannot tell you about it.
c) this is the lowest rate available, and despite less than 10% of applicants qualifying for it we’re not going to give up our competetive edge by keeping quiet about it despite what the regulations say.

I’m sure you have seen it time and again - Typical APR. But how is ‘typical’ defined? What does this somewhat ambiguous but prevalent phrase really mean? Why do all the lenders have it on their advertising?

Well, to answer this effectively we should step back in time a little…

Before the banks became technologically sophistacted, most loan applicants would either be given the same interest rate or be simply declined as too great a risk to take on at the rate in force. However, technological advances led to the development of individual rating for risk, where the interest rate offered is based on the individual credit score of the applicant. This development became very popular with the lenders because it allowed them to have their cake and to eat it too by quoting their best rates as ‘typical’ in their promotional & marketing materials, yet only the lowest risk applicants qualified for it; meanwhile, applicants who represented a higher risk were fobbed off with much higher rates which not only offest the risk but generated much higher profits to the lenders.

After observing these dubious practices, the government took steps to prevent lenders from taking this mismatch as far as they would have otherwise liked to. The regulations now require that any advertisment for a loan must include a typical APR, and that this rate must be no lower than that which at least 67% of the resulting applications would qualify to receive.

So that is what ‘Typical APR’ means!

Tomorrow, we’ll cover the regulations concerning ‘from APRs’ - these are far from what most people think they are…

new figures reveal that cheap loans are disappearing fast in the UK.

following the most recent rise in the Bank of England base rate, there are now just four unsecured loans available charging less than six per cent interest, and as the pressure continues to grow against expensive payment protection insurance often sold together with loans, these could well disappear as well.Michelle Slade, personal finance analyst at Moneyfacts.co.uk says “At this time of year, when many of us are still recovering from the after effects of our Christmas spending or perhaps trying to commit to our new year’s resolutions to sort out our finances, personal loan rates are creeping up again,”

Figures from the comparison service show since the start of January eight lenders have upped their interest rates, some by as much as eight per cent. Currently 40 per cent of £5,000 three-year loans charge more than eight per cent interest and 16 per cent of loan providers charge more than ten per cent.

“With a difference of 14.8 per cent APR, between the most and least competitive rates, shopping around for the best deal is an absolute must,” Ms Slade said.

“Choosing the wrong deal could be the difference between paying £180 per month or £151 and incurring almost £1,044 extra in interest over the three year term.”

Remember if you are shopping around for a personal loan, always check you are getting the most competitive deal, for both your interest rate and if applicable any insurance cover. Making sure you get it right at the start can save you hundreds of pounds in interest. A great starting point is to get The Loan Helper to check the best deal available for you out of the hundreds on offer from the 16 different lenders on their panel.

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