Why is the APR so high?

APR was designed to normalise and compare the cost of traditional loans or credit card balances of several years. For a Wonga loan of a few days or weeks, the equation not only multiplies the actual period of interest up to a year's duration, but also compounds it, assuming interest-on-interest many times over.

The result is a distorted number that bears no relation to the actual interest involved.

Martin Lewis of MoneySavingExpert sums it up perfectly with this example in one of his blogs : “Over a short term APRs are often irrelevant, after all if you borrowed £20 and paid someone back and bought them a pint (£3) the next week, that sounds pretty reasonable. Yet if you were to take it as a loan, and compound it, it’d signify a 143,000% APR – far more than Wonga’s APR.”

By Editor



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