Banking Control è Regulations for Consumer Credit è Annex -1

Annex -1

Description and Examples of the Annual Percentage Rate of Charge (APR)

1.         Description

The APR is a more accurate measure of cost of credit than the nominal commission or profit rate charged because it takes into consideration the amortization of the loan or invested amount balance through periodic payments, as well as all other obligatory costs paid by the borrowers.

 In specific, APR should reflect on an annualized basis the total borrowing costs over the life of a credit as a percentage of the total financing or borrowing amount. The calculation is based on the same basis or formula as the present value of an annuity of equal payments. From this formula, an APR calculation is performed. 

For the calculation of the APR, the Total borrowing costs should include all costs paid by the borrower exclusive of non obligatory costs such as penalties and other costs that may be incurred due to non compliance with the terms and conditions or other commitments under the Consumer Credit agreement.  

Total borrowing costs will include the total commissions or profits paid by the borrower over the life of the credit, any other obligatory costs or fees paid by the borrower under the terms and condition of the credit such as management or processing costs.

2.         The following examples illustrates the APR calculations for a Consumer Loan. All amounts in Saudi Riyals.

            Example # 1

·        Amount borrowed             :           61,000

·        Annual payments             :           18,520

2.1       Obligatory costs under the terms and conditions of the consumer credit agreement.

·        Management fees                                  

or processing fees                      :           1000

2.2       Non obligatory Costs:

·        Delayed payment fees               :              100

·        Early payment or pre-settlement fees   :  2 months commission

2.3       Other Assumptions

·        Loan drawdown                           :           Full

·        Obligatory costs                          :           Paid at the time of drawdown

·        Non obligatory costs                   :           Paid at the time of occurance

·        Pay back period                          :           4 years

·        Period of APR calculation          :           4 years

·        Payments made                         :           End of each Year

·        Management fees or                  :           Paid at the time of the

      processing fees                                      disbursement of the loan

2.4       APR¹                                                             

2.5       Total Net Credit                                 :             60,000  (61000 – 1000)

2.6       The equation becomes                            

                        Giving  X= 9.00000%.i.e. an APR of 9.0%

            Example # 2

            All data and terms and conditions as in example # I with the exception of the following;

·        Principal Amount                   :           60,000

·        The repayment of the loans is at a rate of SR. 1493.1 per month

·        An obligatory management and processing cost of SR. 600 paid at the time of disbursement of the loan.

            The equation becomes:

            or:

            Giving  X= 9.954%, i.e. an APR of 9.954%

            ________________________________

¹ Must be calculated to 3 decimal places. 

Note:   The difference in the APR in the above examples is due to the following;

·        The underlying difference in the present value of SR. 18,520 at the end of the year and the present value of monthly payments of SR. 1493.1. 

·        The difference in the obligatory management and processing cost paid at the time of the disbursement of the loans. 

·        The difference in the borrowed amounts.