Want to borrow a fiver?

This thrilling instalment will bring you tales of lies, deception and daylight robbery. It will also have to touch on the subjects of accountants and banking, for which many apologies. These are all subjects best avoided – but stick with it because it might also save you a great deal of money. I came across the problem in France but it will apply equally elsewhere.

We’ll start with a little test to demonstrate that things aren’t always as they seem. Stay calm, it’s maths but it’s not hard to follow.

Assume I agree to lend you 1,200 euros for a year, and will charge you 10% interest – 120 euros interest in total. So I will give you 1,200 euros now, and each month for the next year you will give me 100 euros to repay part of the loan plus 10 euros interest. Pretty straightforward deal – are you happy with it?

On the face of it you might be, but there is a trick. The advertised interest rate is 10% (120 interest / 1,200 borowed), but in fact the real interest rate is 20%. This is because on average across the year as a whole you have borrowed 600 euros not 1200 euros (1200 at the beginning falling to zero after 12 months = 600 average). So the interest rate of 20% is 120 / 600 average borrowings. So you should have thrown the deal back at me with a suitably rude comment about loan sharks.

That’s as far as I plan to go with examples, but rest assured that interest rates on loans are almost never what you would expect from a glance at them. This is well known, and is why money lenders (banks etc) quote a rate called an APR (TEG in France) which is the ‘real’ interest rate, after all the trickery, smoke and mirrors have been removed. This is the only interesting rate when you are borrowing money.

As a result I was amazed when our bank manager told Mrs B (who was persistently demanding the TEG) that ‘the TEG isn’t important, it’s the amount you have to pay that’s important‘. Any bank manager saying that should be shot at dawn – apart from anything else it’s misleading and untrue.

You’ve seen those loans where you can borrow £1000 and pay back ‘just £30 a month’. Sounds good, until you realise that the £30 barely covers the monthly interest and you’ll be in debt for the next 20 years. For a bank manager to use this kind of deception is very poor indeed.

But you’re stil wondering how I think I can save you thousands of pounds, right? Compare these two loan offers – both based on real loan offers from a leading French high-street bank and a leading French insurance company.

Offer 1: advertised interest rate 6.4%, term of loan 5 years, amount borrowed 10,000 euros, monthly payment 208 euros (167 repayment of the debt plus 41 euros interest and other)

Offer2: advertised interest rate 6.4%, term of loan 5 years, amount borrowed 10,000 euros, monthly payment 190 euros (167 repayment of the debt plus 23 euros interest and other)

OK so the advertised rates are the same, but the monthly ‘charges’ (mostly interest) are almost twice as high with the first lender – a difference of 1,000 euros over five years – or 10% of the total loan amount. How can that be?

Lender 1 had used a misleading interest rate (not using a TEG) – the real rate was 7.4% not 6.4%. They also imposed ‘loan setup costs’ of 126 euros, and had obligatory insurance protection (against death, not  unemployment) of 10 euros a month.

So even with the same ‘advertised rate’ for the loans, one will cost you almost twice as much as the other.So if you need to borrow money ever, in whatever country, get more than one quote and be completely sure you know the ‘real’ interest rate, or you will surely be tricked out of your money.

In France loans also all have a ‘cost of credit’ number – which in principle includes all the costs you will pay as a result of taking on the loan. This helps when you are comparing two identical loans (like the examples above) but will only tell you which of the two is best, not whether they are both complete ripoffs – for that you need the APR / TEG.

Let the buyer beware!