Subscribe!‘APR from..’ how quoted rates can sometimes be not what they seem
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.