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How to check a credit illustration?

Borrowing | Hire Purchase Helpful? 1

Asked by jemnetley, submitted 21 June 2011.

Open Quote How should a licenced credit broker set out its charges/costs/provide a financial illustration?

For example, is this correct and how would I know its accurate?
Price £12995
Deposit £6500
Amount of credit £6495
Charge for credit £2955
84 monthly payments@ £112.50
Total payable £16200 (yes it doesnt add up!)
Based on fixed flat rate of 6.5%
Typical APR 13.1%
End Quote

Answered by Justin on 22 June 2011

The Consumer Credit (Disclosure of Information) Regulations 2010 require certain information to be disclosed to consumers taking out an unsecured loan 'in good time' before they enter into an agreement. There are a number of items this information must include, I've listed the most important below:

  • Type of credit
  • Name and address of the lender (and broker if relevant)
  • Total amount of credit to be provided
  • Minimum duration of the agreement
  • Rate of interest charged (including any conditions that affect this)
  • APR and total amount payable under the agreement
  • Amount, number of and frequency of payments
  • Any other charges payable and associated conditions
  • Warning regarding the consequences of missing payments
  • Rights and penalties for early repayment

If this information isn't contained in or with a 'personal illustration' before you make the decision to borrow then walk and/or report the lender/broker to the Office of Fair Trading (OFT), who police consumer credit.

The illustration you've shown is a bit odd in that total payable is £250 more than the deposit and 84 monthly payments. There must be another charge somewhere which isn't disclosed (or, if it is, it's not clear). Either way, something looks amiss - perhaps an innocent mistake, but it's pretty fundamental!

To check an illustration is accurate start by totting up all the figures to ensure they're correct (as you did). You can check the APR figure by using the Loan rate APR calculator on this site. I just ran your figures and the APR came out at 12%, suggesting there probably is another fee (of £250) somewhere.

As an aside, an APR of 13.1% for borrowing over 7 years sounds high, although this will obviously depend on the financial position/credit history of the person borrowing the money.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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