CHAPTER 6 THE COST OF CREDIT


Let us now compare the APR in the three Mortgage Illustrations outlined above. For clarity of understanding refer back to each Illustration in turn. (See Section 6.2.)  Illustration 1: APR Computation
Amount Borrowed£35,000 over 20 Years. The Amount Borrowed is to be repaid by 240 End of Month Monthly Repayments of £386.81 Therefore:R=£386.81 P=£35,000 n=240 months i=? We want to compute the interest rate being charged over the time period increment, which in this case is one month. Using Formula (F5)R=P i.e.£386.81=£35,000 We want to compute the value of i that satisfies this expression. By iteration, i computes at 1.005% per month. The Monthly % Rate of charge is therefore 1.005%. The Annual Percentage Rate (APR) of charge is computed by compounding the monthly % Rate of charge to 12 months. i.e.APR=100
n=12 months Giving:APR=100 =12.749%  Illustration 2: APR Computation
Amount Borrowed£35,000 over 20 Years. Monthly Interest Rate Charged = 1.005%,i.e. Giving:APR=12.749% (as already computed above)  Illustration 3: APR Computation
Amount Borrowed£35,000 over 20 Years. Monthly Interest Rate Charged = 0.9875%,i.e. Giving:APR=100 =12.515%  Comparing the above Illustrations:
 From the above Illustrations it is clear that a statement of Annual Percentage Rate (APR) of charge provides the borrower with a statute defined yardstick that enables him to make a true comparison of the ‘cost of credit’ as charged by the various Lending Institutions. It is also clear that the failure by First National / Irish Life to indicate the APR on their Mortgage Quotation would be likely to mislead a borrower; it would also be likely to afford First National / Irish Life an unfair advantage over a competitor Financial Institution.
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