When you open any loan on MYC4, on the first page, you will find an item called total cost for business (APR). Ever wondered what that means, is it the same as interest rate, why MYC4 prefers using it, why it seems to differ across countries, its limitations, and/ or any other question? This blog post seeks to help on this, and highlight this measure of cost.
APR in full refers to Annual Percentage Rate. It is one among many measures of the cost of a loan, which include interest rate, total cost of capital etc. APR is quite often confused with interest rate, or mistaken to be the same. The two are quite different. For example on this loan for Grace Waruguru Mwangi, the APR is 54.23%, but the interest rate is 33.83%.
APR as a measure of cost ideally takes into account all costs of a loan including interest, insurance fees, legal fees, processing/ closing fees, forced savings, and any other fees paid upfront on a loan: It then expresses all these costs as a single annual rate. The APR computation assumes that all these costs run across the life of the loan, and thus spreads the costs across the entire loan term (thus the longer the loan period, the lower the APR). In the absence of upfront fees, the APR value would equal the interest rate value.
APR’s usefulness is that it offers a level playing ground for comparing loan pricing by different players. It basically helps us compare apples to apples when it comes to pricing. Microfinance institutions, during product design and marketing, usually vary the various items of costs so as to appeal to a target market; emphasizing strongly on the item of cost that could interest the target borrower more. For example one MFI might offer a one year loan at 16% interest rate plus 3% processing fee; and another offers 18% interest rate plus 2% processing fee; APR will help evaluate which of the two is a cheaper loan. In this example, the loan with 18% interest is a cheaper/ better loan than the one with 16% as it has a lower APR.
Titus Kuria, MYC4's Credit Operations Manager, in a meeting
MYC4 endeavors to promote and ensure transparency in the cost of borrowing. The end beneficiary of transparency in costs is ultimately the borrower. On each loan on MYC4 in the “Costs for Business” segment, we give both APR and an indicative guideline of the total cost in absolute amounts that a borrower will pay. Many financial institutions have been known to lower their interest as a result of disclosure requirements. The financial industry has historically been held in suspicion by consumers due to the many hidden charges associated with their transactions. Many borrowers have suffered from costs that are revealed after signing the loan contract (essentially after buying the goods). To counteract this some countries have resorted to legislate how cost of borrowing is revealed to borrowers; established regimes such as those in the US, UK, Canada and the EU all use the APR measure. The use of APR in Africa is not widespread, but there is concerted effort to ensure its legislated use.
The APR levels on loans on MYC4 differ from loan to loan but vary within a reasonable range. The APRs on MYC4 loans are very competitive in the microfinance industry across all countries we operate in. Ghana is currently the country with the highest APR on MYC4 platform; however, their APR is competitive in the Ghanaian market even compared to banks (who rely on cheap customer deposits to lend). We have numerous instances where borrowers prefer to wait longer (bidding period) for a MYC4 loan than get a provider’s other loan products immediately. MYC4 does not seek to undercut the markets on cost, but focuses on providing fair priced loans to marginalized segments and SMEs.
