Understanding APRs – have you got to grips with the numbers?

According to a recent study, so many people that take out loans are confused by APR (annual percentage rates) that it is costing consumers the equivalent of R3,579,000,000 each year.

The study, discussed on MoneyWise, found that one in five (21%) of successful loan applicants received an APR higher than the initial rate advertised. On average, the loans were 2.4% more expensive. This is because consumers are not really getting to grips with the terminology of the loans and don’t look into the small print of the finance options thoroughly enough. Paul Went comments, “The research shows that many consumers feel that the marketing of loans is at best confusing and at worst misleading.”

There seems to be two main problems which comes from the research – the first is that some loan companies advertise ‘teaser rates’ which are not representative of what the consumer can actually receive. Companies need to be clearer about what they are advertising. The second is that people are simply not understanding APR and do not do the right sums before applying. APR is confusing in itself because it is an annual rate; it shows what the loan would cost you if you borrowed that sum of money over a year – but this is confusing as many personal loans are designed to be repaid in just a few months.

To help combat both these problems so that you apply for a loan which is more transparent, some companies have tried to simplify their advertising and their application processes. For instance, Wonga famously added the ‘slider feature’ to their website many years which allows people to see how much they could borrow and for how long, totalling exactly what it will cost them (including interest and fees.) Simply slide the bar up and down to see how a shorter term would cost you less than if you borrowed for longer. The site now also features a calculator for their personal loans that last up to 6 months.

In essence, the research shows us that consumers need to be intelligent about what they are applying for and clued up in terms of loan terminology. You’ll see terms like ‘repayment period,’ ‘interest,’ ‘balancing payments’ and ‘fixed interest.’ If you do not understand what you are reading, there are plenty of handy online guides which can help you decipher what is being said.