Subscribe!Typical APR - what does it mean?
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…