Refund Calculation

[Bill-K]

Re: Refund Calculation

LOL Peter - I feel honoured that I have kept you up all night. I'm really not that good-looking, you know !!!

Yeah, you have clearly investigated this aspect of APR calculation, and indeed the whole idea of the APR is to encompass ALL the 'relevant' costs involved in borrowing a particular sum of money for a year. So, for example, the old £2 cash advance fee affected the APR applicable to cash advances, etc - even though the interest charged on the advance was (usually) the same as for purchases. So therefore, indeed, it was not correct to 'reverse-engineer' the APR formula in such cases.

I guess that we must remember the 'raison d'étre' for the APR, and that to reverse the calculation is NOT always correct. It would have been nice if the FSA had explained this, though, wouldn't it ?

For me, though, the bottom line is that you seem to have found what the FSA MIGHT have used as their explanation as to why they use the 'simple' method of divide by 12 - and that is good enough for me. So - I'm happy to accept that their methodology is NOT flawed, in the light of your above words and thoughts, and that it is an effort to make the best of a bad job.

It thus seems acceptable to me, and I would happily commend it to the house !!!

[Guest]

Re: Refund Calculation

Hi

Yes bill it would have been nice if like you say, they would have mentioned that the annual percentage ratio they use was not the APR as defined in the Total Charge for Credit regulations.

Peter

[Guest]

Re: Refund Calculation

Hi Bill
I mentioned before on here that for a few years I was employed as development worker for the Tameside Credit Union.
At the time there were 9 individual CUs in the Tameside area, these had been set up by local enthusiasts in church halls, and spare rooms across the area. As you can imagine the book keeping and treasury arrangements were rudimentary to say the least, most relied on account ledgers and manually calculation payments on loans.
Mostly the memberships of these CUs were low around 2000. Many where on a last warning from the FSA for not maintaining sufficient reserves, I don’t know if any of you remember the credit unions that were closed down up here although not in my area.
Part of my brief was to help revive and stabilise these failing resources with a view to an eventual merger into a large combined CU.
CUs at the time all had to operate on a 12.68%APR mark up on loans. Part of the reason for this was because this works out to be 1% per month. The untrained volunteer just had to look at the outstanding balance on the ledger move the decimal point over a couple of places and that was what the member owed for that month in interest, any thing else they paid came off the balance, fool proof, you would think.
Problem came when some CU’s started issuing agreements; theses stated amongst other things the total amount payable on the loan. This is fine as long as you have some understanding of how APR works.
The interest payable on say a £100 loan at12.68% APR over twelve months(reducing ballance) is about £6.5, that means that the total amount payable was £106.50.
Many early CUs operated on the assumption that as long as the interest was paid and the principle settled within the term then that would be fine.
What tended to happen was that the member would come in the month after he had taken the loan and pay £6.5 he would say that is for my interest, you would not see him for six or eight months then he would pay the balance and we would give him another loan.
This was why of course they were losing their money.
You have no idea about the number of hours I spent arguing at various committee meetings across Tameside, trying to explain that they were only getting at the most a return of 7 or 8 per cent in real terms on their loans.
"But the accounts are being settled in full within the time how can this be so", they would say. Eventually they came around, and slowly things began to improve, eventually we introduced a computerised system that enabled repayments to be calculated in equal amounts over the term of the loan, but I know that there are some small rural CUs that use the old ledgers.
All off topic i know thought you may find my experiances of interest being a fellow figure enthusiast, and it is my thread.
Peter

[Bill-K]

Re: Refund Calculation

Thank you for that brief history, Peter. I was aware that you were involved in CU's but not to quite such an extent. That certainly explains your ability to look at a problem, and then find your own solution to it, so that you could then explain how you arrived at it.

For my part, I only ever used maths in my previous life in the electronics industry - and ONLY as much as I needed to !!! But I found myself enjoying working with spreadsheets for some odd reason, and helped Vampiress in CAG, who taught me a lot of things - and still does. Turbo - my partner in crime here - has a more mathematically-based professional background, and I'm always learning from him, too.