APR vs borrowing rates with no charges

lunacyfoundme

Does anyone know if a borrowing rate has no associated charges whatsoever should the APR be the same as the borrowing rate ie if the borrowing rate is 10% with no charges the APR should be 10% also.

I'm talking about the Credit Union model where interest is charged on the reducing balance rather than the banking model where interest is charged up front on the full borrowed amount.

28064212

lunacyfoundme wrote: »

the banking model where interest is charged up front on the full borrowed amount.

What bank does that? Typically, personal loans have their interest calculated daily, same as the Credit Union

slimjimmc

Moved to Banking & Insurance & Pensions

lunacyfoundme

28064212 wrote: »

What bank does that? Typically, personal loans have their interest calculated daily, same as the Credit Union

Do they? I always thought the interest was calculated up front and added as a lump to the amount borrowed?

28064212

lunacyfoundme wrote: »

Do they? I always thought the interest was calculated up front and added as a lump to the amount borrowed?

Nope. Of course, it's possible that some loan types might not allow unscheduled payments, which gives exactly the same effect, but AFAIK, all the banks' "standard" loans have interest calculated daily

lunacyfoundme

Well then I guess that goes back to my original question as to if a loan had no extra fees would the rates not be the same.

I have noticed a few Credit Unions advertising a different borrowing and APR rates but those CUs dont add charges or fees to the loans.

28064212

lunacyfoundme wrote: »

Well then I guess that goes back to my original question as to if a loan had no extra fees would the rates not be the same.

I have noticed a few Credit Unions advertising a different borrowing and APR rates but those CUs dont add charges or fees to the loans.

Because of compound interest. The APR is a calculation of the rate that you would pay for a year. The standard interest rate is not a yearly figure, it could be compunded daily, monthly, quarterly, yearly.

lunacyfoundme

But compound interest shouldn't come in to it if the interest is caluclated on the reducing balance with each repayment rather than the full balance for the full year.

That is in a CU the first payment has interest calculated on the full amount. The second payment has interest based on the reduced loan principal etc.

If the APR is based on the full loan principal for a year is that not an inaccurate indicator of cost for a CU loan ie interest charged on a payment by payment reducing loan principal?

coylemj

lunacyfoundme wrote: »

If the APR is based on the full loan principal for a year is that not an inaccurate indicator of cost for a CU loan ie interest charged on a payment by payment reducing loan principal?

The APR has nothing to do with the repayment schedule, it's the interest as you say that would be applied on a principal if no repayments were made during the 12 months.

Of course if you start paying immediately then the total interest you end up paying will be less since some of the money will only have been borrowed for one month but the APR will be the same.

Assuming you're making monthly payments then you only need to work out the interest that will be applied at the end of each month, even if the bank calculates the interest daily, this is how you do it.....

Say the APR is 6%, take 1.06 and get the twelfth (1/12) root which is 1.004868. That means the the monthly interest will be 0.4868%. If you're working out the payment schedule, apply that rate to the balance at the end of each month, then deduct the monthly repayment and carry the balance to the start of the next month.

In an Excel spreadsheet, you'd get the twelfth root as above with the formula =(1.06^(1/12))