Anorak | Those payday loans really are such terribly bad deals, aren’t they?

Those payday loans really are such terribly bad deals, aren’t they?

by | 28th, November 2012

PAYDAY loans are rip-off. Well, so we’re told, endlessly and at length. Companies charging 4,000 percent APRs to lock the poor into a cycle of debt: why, the bastards.

Which brings me to a number of points.

1) APR: it’s a howlingly stupid method of measuring an interest rate over the short term. By definition a payday loan is only taken out for a short period of time.  why you’d try to measure that short term loan as if it was being taken out for a year is beyond me.

2) The actual interest rate isn’t 4,000 percent of course. That’s just a technical detail of how the law says that you’ve got to measure the APR. You’ve got to add the fee charged plus the interest together in order to measure the APR. And there are some costs involved with making a loan. Someone walks in off the street and asks for a £50 loan (imagine). You’ve got to do something to work out whether they’re good for it. Check their name, maybe their credit record, something. This takes time and costs money. Say, imagine, it costs £10. That’s 20% of the loan amount and you’ve got to actually charge them that amount otherwise you’re losing money lending to them. The APR calculation then says, well, that charge is for a week, so multiply the charge by 52 weeks to give the APR (before we even get to the interest rate itself). We’re now basing out APR on the idea that it costs £520 to borrow £50: that’s a 900 % APR just there. If it still costs us £10 to check but we lend them £100 that APR falls to 450%: it’s just not

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Posted: 28th, November 2012 | In: Money Comments (4) | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink