Financial Advice UK - Loans News - New way to compare loans proposed

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Loans News - Last Updated Friday 21st September 2007

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New way to compare loans proposed

Friday 21st September 2007

A new method which might help consumers to better compare the cost of loans has been revealed in research published by the Council of Mortgage Lenders (CML).

The study proposes a new interest rate, called the Dynamic Annual Rate (DAR), which differs from the current Annual Percentage Rate (APR) model, which is the standard measure for comparing the cost of loans and must be disclosed to borrowers.

The DAR differs from the APR in two key areas - it is calculated for any period of time for which the loan may be kept and it also takes into account all payments and charges over the period for which the mortgage is held.

APR, meanwhile is calculated on the assumption that the loan will be held until maturity, meaning that APR information may not present the real costs of a loan if it is paid off more quickly.

The research suggests that the DAR may be a useful tool to help borrowers understand better what they will end up paying back.

Michael Coogan, CML director general, commented: "The Dynamic Annual Rate provides a useful basis for discussion on the ways mortgage lenders can make consumer information as comprehensive, accessible and meaningful as possible.

"As the research points out it is not fair to describe the APR as the 'wrong' way of calculating the cost of loans. In fact, it is a statutory requirement for lenders to use it.

"The DAR itself does not provide all the answers, but it is a useful measure for consumers who are uncertain about how long they will hold their mortgages, and the intermediaries who advise them."