Money and Finance pages

[Observer]

Some interesting pages on your site John but some of your money and finance comments indiacte prejudice and/or misconception, or are just plain wrong.

For example:

1. On this page (http://www.skeptics.org.uk/article.php?dir=articles&article=compound_interest.php)


Borrowing £10,000 over one year at 5% (approximately 9.1% APR) would mean paying £500 in interest, as that is exactly 5% of the amount borrowed. What if £10,000 was borrowed over 2 years at 5%, how much interest would be charged? The answer is £1,025 (not £1,000).

Borrowing £10,000 over one year at 5% p.a. (such the the repayment is £10,500) is not 9.1% APR - it's 5%.

APR is not automatically higher than the "headline rate" (more correctly, the "nominal annual rate". It is higher if the compounding frequency is more often than annual (or if other charges, such as a facility/arrangement fee, are applied). Thus (using the above example), if the nominal annual rate is 5% p.a. but interest is compounded monthly, the balance after the first month would be £10,000 + (£10,000 x 5% / 12) = £10,041.67. At the end of the second month, it would be £10,041.67 + (£10,041.67 x 5% / 12) = £10,083.51. At the end of 12 months, charging interest at 5% p.a. but compounding monthly (as described above), the balance will have grown to £10,511.62. So the annual percentage rate (APR) of 5% p.a. nominal annual rate, compounded monthly, is 5.12% (still nowhere near 9.1%).

The APR is useful for comparing different finance offers because it eliminates differences in compunding frequency. It also takes account of (for example) arrangement fees. However, it's not much use for calculations - you have to convert te APR to a nominal annual rate in order to be able to use it in a calculation.

2. The results in the table on the above page are mathematically correct but not very helpful. In practice, interest on a loan is very rarely rolled up and compounded every year. The lender wants to be paid interest so, even in the case of an 'interest only' loan, usually there will be at least annual (more often monthly) payments of interest. Without the compounding effect, the total interest paid on a loan of £10,000 with interest charged, compounded and payable annually is 10 x £500 = £5,000 (not £6,288, which would only be the case if interest was rolled up).

3. It is certainly the case that compound interest (expecially over a long period) can add up to a very large amount. But this cuts both ways - anyone with a pension fund benefits from it. Unlike with a loan, we do not usually draw income (or interest) during the term. So a pension fund of £10,000, with 5% p.a. growth, will be worth ~£70,400 after 40 years (before you cheer too loud, don't forget that inflation will have 'eaten away' a lot of that growth.

4. On this page (http://www.skeptics.org.uk/article.php?dir=articles&article=monthly_payment_ruse.php)



The X's reduced their credit repayments by £700 every month Mr & Mrs X were paying over £1,000 every month on credit bills; credit which totaled £29,000. We arranged a low rate Credit Consolidation loan of £30,000 for them. Their new loan repayment was only £324.52 per month - a massive £700 less than before (£324.52 x 240 @ 9.5% APR).

I don't know where this illustration came from but 240 monthly payments of £324.52 on a loan of £30,000 represents a nominal annual rate of 11.72% (APR 12.37%). Anyway, there's nothing wrong with looking at the 'affordability' of the monthly repayment. It's the critical test. It is certainly necessary to recognise the total interest payable but it's not a meaningful test of whether the loan is 'appropriate' or not. The key thing to remember, when considering a loan are:

- don't choose a longer repayment period than is appropriate for the purpose of the loan (e.g. the repayment period should be no more than the useful life of the car (or whatever)))

- watch our for arrangement fees, particularly on shorter terms

[Observer]

I meant to add to my point 1 above that the 5% interest rate referred to may have been intended to be a "flat rate". This is a mathematically simple method of calculating loan repayments but almost completely useless for comparisons. For example, a flat rate of 5% p.a. on a one year loan is the equivalent of 9.1% nominal annual rate (9.49% APR) on a loan with monthly repayments but 5% p.a. (nominal annual rate and APR) with a single repayment.

Whereas a flat rate of 5% p.a. is the equivalent of 9.32% p.a. (9.73% APR) on a 2 year loan with monthly repayments but 6.6% with 2 annual repayments.

I don't think flat rates are very much used now (seen off by the Consumer Credit Act). They made it easy for non-experts to calculate payments. To calculate the (say) monthly repayment on a loan of £10,000 over 3 years, simply take the flat rate, multiply by the number of years (3) (so 15%) and the loan amount (so £1,500) and add that to the loan amount. (so £11,500), then divide by the number of payments (36) = £319.44 per month.

[Admin]

I meant to add to my point 1 above that the 5% interest rate referred to may have been intended to be a "flat rate". This is a mathematically simple method of calculating loan repayments but almost completely useless for comparisons.

Very good for illustration purposes though. ;)

That's what the articles are and the figures are accurate.

[Observer]

Very good for illustration purposes though. ;)

Not at all good because: (i) you didn't mention that the 5% was a 'flat rate' or try to explain it (did you know the difference, I suspect not); and (ii) you didn't state the assumption that the interest and principal would be repaid by 12 monthly instalments (which is absolutely critical for the maths to work). As I said, if the same amount was paid by a single payment at the end of 12 months, the true rate (and the APR) would both be 5% p.a. I don't remember flat rates being used in marketing for a long time (I'm open to be corrected) so building an argument against personal finance marketing practices by using flat rates is itself irrelevant and misleading.


That's what the articles are and the figures are accurate.

As I said, there are other errors (some of which I've mentioned but you haven't commented on). You may not like being corrected but that's your problem.

I don't carry a torch for the personal finance industry. I think there has been a lot of misleading and dubious marketing in the past and perhaps there still is. However, if you're looking to educate, you need to get the facts and numbers right yourself. It look like this is a bit of a 'bee in your bonnet'. A good starting point for education would be to have personal finance modules in the school curriculum. Trouble is, it needs a degree of numeracy which too may people don't have.

[Admin]

Thanks for your input.

None of it is of any use however, and wouldn't serve to improve the articles or the actual point they make.

Thanks for spending your time trying to pull them apart though.

[Observer]

Thanks for your input.

None of it is of any use however, and wouldn't serve to improve the articles or the actual point they make.

Thanks for spending your time trying to pull them apart though.


Well - that's an interesting (amd ironically perverse) response from someone who sets out his stall as being 'skeptical of unsubstantiated assertions'. Why are you so defensive? Do you claim that the errors I've pointed out don't exist? I assure you they do, and I can very easily prove it - mathematically.

Is your position that the errors of fact/unstated assumptions are irrelevant because they don't affect "the bigger picture"? That may have some merit but, self-evidently, the big picture is better if the detail is more, rather than less, accurate. So if an error is made known to you, I'd expect you to welcome the chance to correct it.

What's your real position here? It seems that you are happy to dish out the skepticism/criticism but you can't take it.

[Admin]

Well - that's an interesting (amd ironically perverse) response from someone who sets out his stall as being 'skeptical of unsubstantiated assertions'. Why are you so defensive?

That looks like you're making an Ad Hominem (http://www.ukskeptics.com/explanation.php?dir=articles/explanations&article=ad_hominem.php) argument.

That reveals a lot about your motivation. ;)


Do you claim that the errors I've pointed out don't exist? I assure you they do, and I can very easily prove it - mathematically.

The articles are accurate. There are different methods of working out APR, but as the articles are qualitative in nature, i.e. pointing out the pitfalls in how financial institutions try to get us to think about finance, then errors in a few decimal places are not really an issue.


Is your position that the errors of fact/unstated assumptions are irrelevant because they don't affect "the bigger picture"? That may have some merit but, self-evidently, the big picture is better if the detail is more, rather than less, accurate. So if an error is made known to you, I'd expect you to welcome the chance to correct it.

This is a pointless red herring point that has nothing to do with the articles' purpose.


What's your real position here? It seems that you are happy to dish out the skepticism/criticism but you can't take it.

Ad hominem again. ;)

What's your real position here?

I notice that your company supplies financial services.

A quote from your website states:

Our customers providing business to business services are more and more looking to a single source to buy, manage and maintain equipment and subsequently to upgrade, refresh and dispose of it when it has no more use. All they want to know is how much will it cost every month.[Bolding is mine]

Perhaps this is why articles like the Monthly Payment Ruse (http://www.ukskeptics.com/article.php?dir=articles&article=monthly_payment_ruse.php) have got under your skin. ;)

Perhaps that's why you're being so anti here?

I think it's more than likely that your own financial services use the very deceptions against your own customers that I've pointed out (!)

Like I said, thanks for your input - but don't expect your inane ramblings to be taken seriously here. We deal with idiocy as a matter of course. ;)

[Observer]

That looks like you're making an Ad Hominem (http://www.ukskeptics.com/explanation.php?dir=articles/explanations&article=ad_hominem.php) argument.

That reveals a lot about your motivation. ;)

What's 'ad hominem' about what I've posted? I started off by pointing out the inaccuracies (and there are more than the ones I've mentioned so far) in your pages on personal finance. You have (so far) refused to acknowledge them. I'm entitled (without being accused of ad hominem argument) to question why. You don't dispute the errors - so why not admit them and agree to correct them (I'm willing to help you do so, if you want).


The articles are accurate. There are different methods of working out APR, but as the articles are qualitative in nature, i.e. pointing out the pitfalls in how financial institutions try to get us to think about finance, then errors in a few decimal places are not really an issue.

There are 'pitfalls' in the way personal finance is marketed and I have no argument with you drawing attention to them - in fact I'd say that's a good thing. But better that the pitfalls you point out are the real ones and that your 'illustrations' are accurate and beyond criticism - which they're not.


This is a pointless red herring point that has nothing to do with the articles' purpose.

Ad hominem again. ;)

Substantiated criticism (and my criticism was substantiated, and is valid) is NOT "ad hominem" (even if you don't like it). On the other hand, your groundless assertions of "ad hominem" amount, in themselves, to ad hominem against me.


What's your real position here?

I notice that your company supplies financial services.

A quote from your website states:

Our customers providing business to business services are more and more looking to a single source to buy, manage and maintain equipment and subsequently to upgrade, refresh and dispose of it when it has no more use. All they want to know is how much will it cost every month.[Bolding is mine]

Perhaps this is why articles like the Monthly Payment Ruse (http://www.ukskeptics.com/article.php?dir=articles&article=monthly_payment_ruse.php) have got under your skin. ;)

Perhaps that's why you're being so anti here?

Your use of administrator privileges to publicise personal information is, quite probably, improper. However, I'll let it pass. I have nothing to hide. I am employed in the finance industry (not personal finance, which is the target of your pages) and have been for over 20 years. That entitles me to claim (and I do) some expertise in financial matters. Perhaps you would explain what background/knowledge you have of finance that justifies your implied claim to expertise?


I think it's more than likely that your own financial services use the very deceptions against your own customers that I've pointed out (!)

Now that is ad hominem. You're attacking me (and/or my employer), not my arguments.


Like I said, thanks for your input - but don't expect your inane ramblings to be taken seriously here. We deal with idiocy as a matter of course. ;)

"Inane ramblings" ... "idiocy" - more ad hominem by you.

I came to this site because it was recommended by someone I respect. It's very disappointing (doubly and triply disappointing because of your purported stand against pseudoscience) to find that you're no better (in terms of ability to reason independently and with an open mind) as the people you rail against. Really you're worse, because your refusal to acknowledge, far less accept, constructive criticism is, given your purported 'mission', the purest hypocrisy.

[Admin]

The point is "Observer" that you've come in here attempting to ridicule me because, in your opinion, there are some inaccuracies in the articles.

But:
The articles are illustrative.

They are meant to get people to think about how they're led up the garden path by people like you who try to stress low APR rates and low repayments without actually considering the true cost of the loan. That is the message; it's not a tutorial on how to work out APR rates.
.
The figures are not wrong. ;)

You tried to point out that the 9.1%APR figure I use is wrong and then when you worked it out you had to back track and criticise me for using a "flat rate" instead. For a 'financial expert' you made a bit of a prick of yourself there, didn't you? ;DSo, all in all, you've steamed in here, being rude, offensive and sarcastically mocking but the point you're making is neither appropriate nor accurate.

You've obviously got a bee in your bonnet about something, hence your belligerent attitude, and you've had your say, but I don't accept your criticism for the reasons given above.

We're not Pierrots or Fools in here. ;)

[Observer]

Your responses are simply astounding. You accuse me (without justification) of 'ad hominem' argument and then proceed to abuse me - repeatedly.

I admit my first post was challenging - it was intentionally so. I wanted to see if your self-proclaimed 'skepticism' is more than skin-deep. It clearly is because, in the language of your own leading page, you are in 'denial'



Denial
This approach, a dogmatic one, is where a claim is dismissed without consideration because it does not fit in with a person's current understanding, belief system or world-view.

You don't really understand finance, or the mathematics that support financial calculations, so you choose to ignore my criticism because it doesn't fit your "understanding, belief system or world-view".


The figures are not wrong.
;)

You tried to point out that the 9.1%APR figure I use is wrong

The relevant text on that page states:

Borrowing £10,000 over one year at 5% (approximately 9.1% APR)

You've applied 5% with a 'flat rate' method of calculation to arrive at a 'true rate', without stating that's what you were doing (if you knew). That is grossly misleading. It implies (in fact it pretty much states) that any quoted rate, because of the effect of compound interest, is in fact much higher than the value stated. That's profoundly wrong, as I've explained and given you the exact calculations to prove that you're wrong.

Your next illustration


Borrowing £10,000 at 5% (or 0.05 as a number) for 5 years results in the following calculation: 10,000 * 1.055

is mathematically correct. But the 5% rate (the same rate as used in the first illustration) is not used in the second one as a flat rate but as a true rate. The inconsistency of method emphasises the misleading effect of the first illustration.

Further, you've ignored (denial again) the fact that 'flat rates' are no longer used in marketing material - APRs must be stated.

So:


The articles are illustrative.

They are meant to get people to think about how they're led up the garden path by people like you who try to stress low APR rates and low repayments without actually considering the true cost of the loan.

is also wrong. APR's do represent the "true cost of a loan" (subject, as I cautioned, to the effect of additional costs such as arrangement fees).


We're not Pierrots or Fools in here. ;)

You're the worst sort of fool. You're wrong - and you either don't know it or refuse to accept it.

MENE, MENE, TEKEL, UPHARSIN

[Admin]

Thanks again Observer - for another completely pointless post.

I would listen to you if you actually had a useful point to make - but you're arguing against something that the articles are not designed to do (!)

One explains the concept of compound interest, the other explains the tactic of getting us to think in terms of monthly repayments rather than the cost of the deal.

That is their purpose and that is what they do.

Yes the maths is basic (and accurate) but it is intentionally so; that's because most people are not comfortable with formulae and I want people to understand the articles not get put off by them being too complex to understand.

You've come in here with your magisterial attitude, thinking you can talk down, ridicule, and mock people (or me) but all you've shown is that you haven't grasped the purpose of the articles, you've wrapped yourself up in knots trying to show that they're wrong and then shifting focus when you've realised they're not.

And no, I'm not 'in denial' - I've looked at your criticism and concluded that your criticism is not appropriate for the scope of the articles and that you've got some other motive for criticising them (and me) other than trying to be altruistic.

You seem to have steamrollered in here for the sake of confrontation; but, there's a saying: never argue with a fool as those watching can't tell the difference. And I certainly don't want to be associated with you and your style of argumentation.

You come over as being high on opinion but low in intelligence. I have better things to do than to argue with the metacognitively challenged.