APR(Annual percentage ration),TCC (Total charge for credit)and TAP (Total amount payable)

Fees Charges interest and APR.

First a look at basic simple interest

Interest
Basic or flat rate annual interest is calculated using three basic values
1) Total Credit (the amount you borrow)
2) Interest
3) Repayment period
The sum of the first two is the Total Amount Payable (TAP)
So say you borrow £200 pounds over 24 months and the interest is 30% p/a
The interest on the credit would be £60 per year for two years or 2*60=£120
The TAP would be interest + total credit £320
The repayments would be 320/24 = £13.33 per month

The flat rate interest can be used by the lender when comparing various loan options in order to get the best deal but it does not give the full picture it ignores two important points.

1) The repayment intervals
Say you borrow £100 with twelve monthly repayments at a flat annual rate of 6.5%.
This means your TAP is £106.5.
Now say you borrow the same amount £100 over twelve months but you repay the loan in one repayment on the last month of the term (ie one payment of £106.5)
The flat rate on both loans are the same but which gives the better deal?
Obviously the second because you have had the use of the money longer before you have to pay it back,
The APR takes account of this in the first instance the APR would be 12.68% and in the second a much more attractive 6.5% .
This is worth remembering when we talk about fees and charges that are paid in addition to the first or as an initial payment ,as we have seen an irregular payment especially at the beginning of the term can have a great effect on the APR

2) Fees Charges and Compulsory Insurances
The additions of fees charges or other items that must be taken out in order to get the loan will of course effect the desirability of the loan purchase and must be reflected in the APR.
This is done by directing the creditor to add any such sums to the interest creating a figure known as the :
Total charge for Credit

TOTAL CHARGE for CREDIT consists of any monies that you contractually agreed to pay in order to procure the loan. It Includes;

  • The interest charged on the loan
  • Any setting up fees charged by the creditor
  • Any insurance that was conditional on you getting the loan (if you didn’t buy they wouldn’t give you the loan)
  • The final purchase element on a hire purchase agreement
  • Any brokerage charges
  • Any attached agreements necessary to the purchase of the loan

(An exhaustive list of charges that should be included in the TCC are contained in the TCC regulations 1980)

We have seen that that he interest rate is calculated using the total credit and the amount of interest .

The APR. is calculated by using the total credit and the (amount of interest + all the compulsory charges (or the TCC) ).

The Regulations and Total Charge for Credit
Section 9(4) of the Consumer Credit Act 1974 says
“For the purposes of this Act, an item entering into the total charge for credit shall not be treated as credit even though time is allowed for its payment.”
Section 20 enables the secretary of state to define “what items are to be treated as entering into the total charge for credit, and how their amount is to be ascertained;”.
This he does in the statutory instrument, Total Charge for Credit Regulations.

Correctly applying fees and charges to an agreement.
If a fee or charge falls into the category of a charge for credit as we have seen the regulations give instructions on how it should be added to the agreement this is not always as straight forward as it seems.
Say you buy a car for £2000 the interest is 40% which comes to £50 and the dealer wants to charge you a document fee of £20.
Total credit £2000

Total charge for credit made up of £50 interest + £20 fee

TAP £2070
The repayments on equal monthly payments would be 2070/12= £172.50
This is in accordance with the act as the fee is include within the TCC and as we saw earlier would give an accurate figure when the APR is calculated.

Now lets look at what sometimes happens.

A)
A fee is charged at collection of the vehicle as well as being in the total charge for credit.
This is easily overlooked as the salesman usually says that you are simply paying of the fee up front and it will be knocked off your total, this is of course bull. As we see here it increase your TAP and ends up in the dealers pocket he then sends the undeterred agreement to the credit company and bobs your uncle.

Total credit £2000 +£20

Total charge for credit made up of £50 interest + £20 fee

TAP £290

B)
The fee is added to the total credit
This breaches section 9(4) of the act because as you see it has caused the interest rate to increase and also the TAP which will also of course result in the repayments being increased.
This is not always easy to spot on the agreement, what usually happens is that the first payment is increased in order to pay the fee.
There is no way of getting around the illegality of this.
Total credit £2000 +£20

Total charge for credit made up of £50.5 interest

TAP £2070.5

C)
The fee is just for convenience being added to the initial payment, but is separate to the main agreement on which all the calculations for APR are correct.

This would mean that a compulsory fee was not being factored into the calculation for APR and it would be therefore inaccurate.

Note
It is not as easy as just saying that the creditor cannot add the fee to the first payment. He can but the fee must form part of the charge for credit and must have an effect on the APR.
The only way to check that he has complied is to do the maths and calculate the APR
1 With the fee included in the Total charge for credit.
2 With the fee included in the Total Credit
If the figure on the agreement agrees with 1 then the agreement is OK if it agrees with 2 then you have your claim for unenforceability.
(Remember that if the agreement has a larger initial payment your calculation will have to allow for an irregular first payment in order to give an accurate APR see ((1) The repayment intervals above