Don't wait for Europe to sort out this misleading loan trick. And no, we're not talking about PPI this time!
I was quite excited last week when the EU announced that it was backing new personal loan rules. The main aim is to break open the _800 billion market, so that it's easier to sell loans in other EU countries.
To do this, it's standardising the information that lenders must give to consumers. All adverts and documentation must contain the same information. However, I suspect that the UK won't see a great deal more choice of lenders, because we use pounds, not euros, which is inconvenient for European businesses.
Still, if the EU gets it right, perhaps it will clear up one little problem. It's looking at standardising the way that interest rates -- the Annual Percentage Rate (APR) -- is calculated. In the UK it's already supposed to be standardised, but it can currently be manipulated by lenders in several ways, making some loans seem cheaper than they really are. (This article explains more.)
Here's an example of the problem, using The Motley Fool's cheapest partners:
A selection of £8,000 loans over three years
Lender and | Typical | Monthly | Total | Difference |
|---|---|---|---|---|
Moneyback Bank - | 6.1% | £243.14 | £8,753.04 | - |
Northern Rock - | 6.2% | £243.49 | £8,765.64 | £12.60 |
Alliance & Leicester - | 6.3% | £243.83 | £8,777.88 | £24.84 |
Eskimo - | 6.9% | £245.89 | £8,852.04 | £99 |
GE Money - | 6.3% | £246.32/ | £8,867.52 | £114.48 |
Bank of Scotland - | 6.4% | £246.71 | £8,881.56 | £128.52 |
I'm sorry to say we currently have a tiny rounding error in our loans search that affects the monthly payment and total repayment figures above, but the error is small.
The top two in the table are two of the three cheapest personal loans you can get (the third being Masterloan's Personal Loan - telephone only). Currently there is nothing misleading at the very top there, because the APR, the monthly repayment and the total repayable are all the best. What's interesting though is what happens beneath that.
Eskimo's loan has an APR of 6.9%, yet it is cheaper than both GE Money and Bank of Scotland, which have APRs of 6.3% and 6.4% respectively.
In fact, Eskimo's loan is about £30 cheaper than the Bank of Scotland's. Also, GE Money's APR is the same as Alliance & Leicester's, but Alliance & Leicester is £90 cheaper!
What's more, using our loans centre to search the whole market (rather than just Fool partners), there are 22 lenders with apparently higher interest rates than the Bank of Scotland, but which are actually cheaper!
The likely explanation is that the Bank of Scotland and GE Money both allow payment holidays. This lowers the APR, but actually slightly increases the total interest bill! So don't look at the APR, look at the total repayable and the monthly repayment. It could quite easily save you £90.
> Compare unsecured loans.
> The Loan Arranger Rides Again!
> Personal Loan Rate Tricks