Anorak | Why Would You Pay 4,200 % APR On A Loan? The Unauthorised Overdraft Scam

Why Would You Pay 4,200 % APR On A Loan? The Unauthorised Overdraft Scam

by | 20th, September 2011

WHY would you pay 4,200 % APR on a Loan? Strangely, the answer is because it could be cheaper than getting an unauthorised overdraft from your bank .

Wonga, the short-term loan business, claimed last week that it was more transparent than the banks, after the Independent Commission on Banking (ICB) said customers were confused by the welter of charges associated with their current accounts.

Errol Damelin, the founder of the company, said customers could not compare the cost of borrowing money in the short term when the most common way of doing it was through a bank overdraft.

Wonga is forced to display a representative annual percentage rate (APR) for its loans of 4,214pc. However, Mr Damelin said that, because it offered loans limited to 30 days, the APR was not relevant, and the loan was often cheaper than unauthorised bank charges for the same amount.

The bank might charge you £30 for an unauthorised overdraft, Wonga only £20 or so for a loan for a few days.

Now it’s true that a 4,200% APR is an eyewatering sum: but it’s also an annual rate. Which probably isn’t the way to think about the costs of a loan for a few days. Because, like it or not, it costs something to organise a loan, over and above the interest that has to be paid upon it.

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Posted: 20th, September 2011 | In: Money Comment | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink