News and views
Date article publshed: 30/01/2013 Read original article >
On 30th January 2013, the Daily Mail published an in-depth investigation into the high cost of unauthorised overdrafts.
It also printed a supporting editorial that suggested annual percentage rates (APRs) can be a misleading way of comparing short-term credit.
As the investigation points out, an unauthorised overdraft from a bank can have an APR of 53,000,000%, which highlights the absurdity of this measure for short-term lending.
Wonga can often be a cheaper alternative to overdrafts like these, and we have always argued that making customers aware of the total cost of repayment (TCR) is far more useful in helping them decide what service to use.
APR simply isn’t relevant for short-term products. It’s ridiculous having to compare 4,214% with 53,000,000%.
We and other short-term lenders are required by a European Directive to state the representative APR of our loans, despite the fact that we do not provide loans for anywhere near as long as a year. The average Wonga loan is for 17 days, and the interest on that loan is not compounded over a year in the way that the APR rules imply.
The APR figure therefore bears no relation to the interest the customer actually pays. It distorts the true cost of our loans, and makes it impossible to compare it properly to other products - especially with unauthorised overdrafts being exempt from having to display their APR.
Alongside the Daily Mail, a growing number of people now recognise how misleading APR is in the context of short-term loans. Consumer champion Martin Lewis has remarked that APR is “a farcical nonsense when it comes to short-term borrowing”; the head of the Office of Fair Trading last week noted that “very few people understand APR properly”; and Consumer Affairs Minister Jo Swinson MP said that “with short-term credit the APR is not necessarily the most relevant statistic.” There are many more examples of knowledgeable observers making a similar point.
Despite having to show a shockingly high APR, we have managed to attract hundreds of thousands of customers from traditional credit suppliers, by making it clear what they need to pay back before they apply for a loan. When we speak to our customers, it is this transparency, flexibility and ease of use that they most like and value about the service. It means they can budget more easily when they are in a tight spot financially, and feel more in control of their finances during emergencies.
Customers need a level playing field - they should be able to compare easily the cost of different short-term credit options. Only then can they properly decide which product is best for their own situation, be it an overdraft, credit card or short-term loan.
APR does not allow them to do that. It complicates what should be a clear choice for customers.
A change is needed to address this cause of consumer detriment. The Daily Mail investigation is a valuable contribution to that debate.
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