The Annual Percentage Rate (APR) was principally introduced for consumers to make comparisons between one financial product and another.
Here we'll look at the APR you may receive from Shire Direct, and why you may well receive a lower rate than that shown in our 'Overall Cost for Comparison' rate for mortgage products, or a lower rate than that shown in our 'Typical APR' for homeowner secured loans.
Certain types of financial promotion, but not all, must contain the APR relating to the type of finance offered, and if a wide-ranging set of schemes are discussed, for example mortgage products that are available for all types of circumstances and all types of borrower, then the APR published must be one that can be offered to 66% of consumers that are likely to respond to the advertisement - or better!
'How does that work?' you may well ask.
Well the 66% rule might seem slightly complex, but it is an imposition by the regulators that lenders and intermediaries must adhere to in order to prevent the more "inventive" organisation from publishing a ridiculously low APR that may apply only to a very small number of consumers.
With regards to mortgages, this demand forms part of the Financial Services Authority's (FSA) Treating Customers Fairly (TCF) initiative, and should ensure that an advertisement falls within the FSA principles that financial promotions must be clear, fair and not misleading. Naturally Shire Direct complies with these requirements.
So, let's say that out of 10 customers, the following is a list of the APR the customers received on their financial transaction (from the lowest to the highest):
| Customer | APR received: |
|---|---|
| 1 | 4.99% |
| 2 | 5.05% |
| 3 | 5.34% |
| 4 | 5.98% |
| 5 | 6.25% |
| 6 | 6.49% |
| 7 | 7.15% |
| 8 | 8.00% |
| 9 | 8.55% |
| 10 | 9.97% |
In this instance, 70% of customers received a transaction with an APR of 7.15% or less. Accordingly, our advertisements should promote that our typical APR is 7.15%, although as we can see, most of our customers (customers 1 through to 6) would have received an APR of less than this.
The APR was introduced in the 1970's under the provisions of the Consumer Credit Act and required lenders and promoters of financial products to provide this calculation in order that borrowers could compare the cost of different loan products.
The APR takes into account the various costs of setting up a mortgage, such as valuation fees, lender's applications fees, brokers fees and certain legal costs. The calculation also has to take into account discount periods, and when the interest is calculated. The APR calculates what the average interest rate will be over the life of the mortgage.
You may have noticed on some of our pages that there are two different APR's, one of which is of a larger point size than the other. For pages on our website that promote Mortgage products as well as Homeowner Secured Loans we are required to publish an APR for each type of product - an 'Overall cost for comparison' APR for Mortgage products, and a 'Typical' APR for Homeowner Secured Loans.
Under the provisions of the Consumer Credit Act, the typical APR figure for Homeowner Secured Loans must be 50% larger than that of the rest of the APR statement. There is no such requirement from the Financial Services Authority for the 'Overall cost for comparison' APR figure as far as mortgages are concerned.
For more information on APR's, please take a look at our Annual Percentage Rate (APR) page in our Mortgage Glossary.
Shire Direct and Shire Direct Mortgages are trading styles of Shire Processing Centre Limited which is
Authorised and regulated by the Financial Services Authority in respect of regulated mortgage products and general insurances.
Registered No: 302389. Commercial funding and Secured Loans are not regulated by the FSA.
Licensed Credit Brokers. Consumer Credit Licence Number: 349999.
Shire Processing Centre Limited is registered under the provisions of the Data Protection Act by the Information Commissioners Office: Registration No: Z6795249. Registered in England & Wales. Company number: 2732202. Telephone calls may be recorded for training, monitoring and security purposes. All applicants must be aged 18-years or over.