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. Someone, somewhere, needs to make the decision about whether to rant the loan. Or, as with some companies, someone needs to write the software that does this. Paperwork needs to be done, ofices rented, staff employed: these are just costs that have to be paid out of whatever amount is earned from a loan.

And if it’s a small amount of money for a short period of time then these fixed overheads will be a large amount of that small sum of money. There just isn’t any way out of this. Goodwill (think, roughly, Oxfam Shops) over in the US tried to do these payday loans with no profit at all and largely using volunteer labour. They had to charge over 200 % APR just to cover even those reduced costs.

As I say, there’s just no way out of it. Short term loans for small amounts of money are very expensive to hand out: therefore they will always be expensive.

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