Headline APRs may not be as impressive as they sound
February 26, 2008
Consumers that are falling for glossy ads advertising headline APRs on borrowing are being warned to watch out and act carefully, as the seemingly attractive headline rates offered by some lenders may not be quite as attractive when Payment Protection Insurance is brought into the equation. Many lenders advertise great rates in magazine, radio, and television advertisements. However, it has come to light that in some cases the APR may actually be incorrect because Payment Protection Insurance has not been taken into account when calculating it.
Some campaigners and debt charities are now saying that there are many loan agreements that may not even be enforceable because the APR, had it been worked out with Payment Protection Insurance, was actually far higher than advertised. The cost of this cover needs to be taken into account when calculating the APR, and the debt charities state that this has not been done in many cases. Reports indicate that around fourteen million loan agreements may have been affected because of this issue.
In 2005 new regulations were brought in to ensure that lenders took PPI into account when working out APR. However, one official stated: “There is a lack of clarity in the Consumer Credit Regulations 2004. When these were brought in 2005, the OFT issued draft guidance stating lenders should include the cost of PPI in the calculation of the APR in loan agreements, and set out a single APR for the overall cost with subheadings that broke this down into the loan and the PPI policy so you could see each element clearly.”
A review into this problem will now have to be carried out by the Office of Fair Trading. It is thought that over £6.5 billion worth of loan agreements could be affected and unenforceable as a result of these misleading APR calculations.
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