Bridging veteran says no to APR

Bridging veteran says no to APR


Recent debates concerning transparent charging structures for bridging loans have flagged the Annual Percentage Rate (APR) charged by lenders as a suitable way of comparing the cost of loans.

This suggestion has ruffled the feathers of many a bridging professional who believes that APR is a misplaced concept within the short term market; many are of the opinion that a niche sector, such as bridging, would not benefit from applying methods adopted by the mainstream market.

Offering a colourful insight into the APR debate, bridging finance expert, Sidney Cohen, speaks to B&C…

Oh Crikey!

We’re not heading down this dead end road again, are we?

Let me ask you a simple question - what can be ‘fair’ in being forced to quote a rate for a bridging loan that no borrower, nor 75 per cent of the finance industry, understands?

If you don’t believe me, then carry out this simple test; go to your local high street and ask 100 people the very simple question - Do you know and can you explain the meaning of APR and how it affects your loan?

If you find one in a 100 then you have performed a magic feat! That in itself should be sufficient to prove that quoting an APR is pointless. In fact, APR is worse than pointless, it is confusing, misleading and impossible for the average borrower (and I could add financial adviser) to understand.

I have been dealing with APRs since they were first introduced along with the Consumer Credit Act (CCA) in 1974. If you want me to be frank, I can tell you the one plus point about the APR is that because it is so misunderstood it is easy for the borrower to be unable to follow the true cost of the facility being offered.

[Sidney offers the below example…]

A borrower was once quoted an APR for a ten year term loan, and upon drawing his breath, he said, "Oh, that’s dearer that I expected!” 

It is often the case that a borrower fails to understand that they are able to obtain a lower APR by taking their loan out over 15 or 20 years – the real rate has not changed at all, but the longer the term, the lower the APR.

So, I would suggest that we do not get carried away with the idea of switching to a method of quoting the rate.

APR is little more than mumbo-jumbo to the vast majority of the population, but if things must change let’s be certain that we make it clearer and not more complex.

All in all, I do not think that APR is a fair way to quote for bridging. The most important aspect of pricing any loan is to set it out in a simple format and avoid gobbledegook.

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