When smaller means bigger
One of the most talked-about and confusing numbers in finance just got bigger. Our Representative APR (annual percentage rate) is now 5,853%. As always, it is obvious for everyone to see on our home page - just as the actual cost of our loans is made crystal clear, in pounds and pence, before anyone applies.
So why has it increased? Well it’s because more approved applicants are taking smaller and shorter loans now, so we have recalculated the representative example accordingly. And why is it confusing? Because we actually charge 1% simple interest per day, plus a £5.50 cash transmission fee, for loans that are usually taken for less than 20 days. We never, ever charge thousands of per cent interest.
People only pay for the time they need the cash and a typical loan example of 15 days would come with 15% interest. But while shorter Wonga loans cost less in real terms for our customers, this trend means a bigger Representative APR. It’s crazy but true.
This is just another example of why not only we, but the Public Accounts Committee, a cross-party group of MPs, think the APR rules are “outdated and misleading” when it comes to short term credit.
The ‘A’ in APR stands for annual and the calculation takes a representative Wonga loan of less than a month and multiplies it up to a year. The sum doesn’t just take our daily interest of 1% and assume an annual loan term, however, which would mean an APR of 365%. It also assumes daily compounding of interest (where an ever-growing balance means you pay interest-on-interest).
So when a very short loan term is used in the APR calculation, its means even more theoretical multiplication and compounding is required to generate an annualised rate of interest. The result – thousands of per cent in our case - bears no relation to the actual interest or cost involved in the real loan example.
Our large Representative APR is simply a reflection of the fact our loans are generally taken for much shorter periods than a bank loan or a month-long payday loan. That’s why we, a number of experts and, most importantly, our customers have long been saying that a clear Total Cost of Repayment (TCR) is the logical and vital information needed when considering a loan of a few days or weeks.
Providing a clear and full cost - up-front - is just one of our responsible lending policies.
If you’re still confused about APR, for which we wouldn’t blame you, try watching our short video.
Luke Manning, Editor
We’ll endeavour to respond to all queries relating to OpenWonga within 24 hours