September 2005 Q 1. 10.6% or 5%

[uktous]

Hi, based on that question, whether the person is paying a 10.6% of interest or a 5% of interest?

I have read the exam report but it does not mention it clearly, 10.6% or 5%?

Note:
APR is 10.6%
Flat rate of interest is 5%

 

[didster]

Not sure what your question is.

He's paying both depending how you look at it.

APR of 10.6%pa is the "true rate", taking account the length of time each amount is outstanding.

The 5% is how banks, credit card companies, etc commonly market the rates. This figure is a simple (as in simple interest) calculation of the total interest payable relative to the amount borrowed.
It is also notably smaller.

If you change the repayment period, the APR should stay the same, but the second rate will change.

Under both the actual £ payments will be the same, its just presentational differences.

 

[uktous]

hi, I got 2 qusetions

"If you change the repayment period, the APR should stay the same, but the second rate will change."

oh, really?

I suppose we first use the 5% to calculate interest amount charged and then calculate the APR (10.6% in this case).

Q1
Is there any circumstance that the flat rate (5%) not chanage, but the APR change?

Q2
I want to ask whether 5% or 10.6%, because the client in the exam paper is asking whether he is paying 5% or 10.6%

 

[didster]

"If you change the repayment period, the APR should stay the same, but the second rate will change."

I say this since the APR is the "true rate" which the credit company will charge.
They aren't going to use "marketing trickery" on themselves to have you still pay 5% if you change the payment plan. They could do it the other way, but that would be silly.

Check the early termination payments for yourself.
I did the one year one which matches the APR but gives a flat rate of about 9%.

If you want to know the real rate of interest that you're paying it's the APR. This is the rate your payments will be calculated on and is what you can directly compare to other loans/investments. If you have loans on higher APR and can extend the lower APR one, you should pay off the higher one first.
I believe the regulators also make financial companys publish the APR, albeit sometimes in small print.

While we could say that the 10.6% is the right rate, we need to be careful since the other one isn't incorrect. Examiners said
"Some candidates incorrectly suggested that the flat rate was wrong, either explicitly of implicitly. Better candidates managed to explain that it does not represent the true cost of a loan, although it is still correct."

Like many things, there is no one right answer, just 2 perpectives. Instead of going all out for one answer, you can explain both sides and let the reader understand both from which he can (if still necessary) decide which one he favors.

 

[calibre2001]

Just want to understand why we need to divide by 2 as mentioned from the sample answer given in the examiner report. See below

I checked other APR examples on the net and found there is always a division by 2.

Thanks.

You can see it's the right kind of level if you think that over the 4 years the amount you owe will reduce from £13,500 to 0, so on average will be about half that £6,750. With yearly interest of 5% of £13,500, which is £675, the real interest rate is intuitively about 10% a year (£675 divided by £6,750). Thats a very rough-andready calculation, and the APR is complicated to work out, but it suggests that the APR quoted is correct