Payday lender Wonga has skyrocketed its representative annual percentage rate to a whopping 5,853 percent. The company says not to fret because the charges are still the same. If the interest rate on your credit card shot up by 1,600 percent, you would notice. Should you be equally as concerned about this short-term lending announcement?
What’s a Representative Interest Rate?
Wonga made the change public on their website and through a series of news releases and videos last week. The modification has fueled both sides of the UK payday loan controversy. Before choosing a side in the debate, you must understand the basics of a representative APR. This calculation shows how much the average consumer would pay in interest over one full year.
The rate is supposed to help borrowers compare payday loans with traditional bank loans and credit cards. For example, you may pay 6 percent APR on an HSBC loan, 19 percent APR on a Barclaycard and 5,853 percent APR on a Wonga advance. Since Wonga’s loans last for 45 days or less, not 365 days, the representative interest rate can be misleading.
Wonga Says Don’t Worry, Be Happy
Wonga says not to be too concerned about the high APR displayed on their responsive website. The company argues that the new APR, up from 4,214 percent earlier this year, affects only fictitious annual loans that they do not grant. The firm extends loans of up to £1,000 for 45 days or less. They freeze interest payments if customers do not pay back the debt within 60 days. Borrowers typically repay Wonga funds within 18 days.
Proponents emphasize how outdated the APR calculation is for a short-term payday loans lender. The government mandate specifies compound interest, which means that interest grows on top of interest until the outstanding debt falls to zero. It does not accommodate Wonga’s current charges of a £5.50 transmission fee and one percent simple interest per day. In the end, the formula does not reflect how today’s payday customers truly borrow and repay funds.
Total Cost of Repayment
Wonga, along with other payday shops and even some government ministers, want you to look at the total cost of repayment and not just the interest rate. The Office of Fair Trading had reported earlier this year that the average cash advance loan amounts to £270 with a 30-day payback. The cost of credit ranges from £14 to £51 for a £100 short-term loan. On a £100, 30-day Wonga loan, the total paid in interest and fees equals £37. This sum sits near the middle of the OFT range and is one of the highest rates discussed on WhichPaydayLender.co.uk.
MPs Warn of Irresponsible Lending
Opponents refer back to the exceptional interest rate and condemn Wonga for taking advantage of unsuspecting customers. Sheffield Central MP Paul Blomfield has introduced a bill to tighten short-term money lending and limit the amount of interest that may be charged. Blomfield explains to The Guardian: “These interest rates are outrageous but only tell half the story. Borrowers are also encouraged to roll their loans over and face additional charges.” Several areas in the United States and Europe already cap short-term interest rates.
The OFT is expected to refer Wonga and other leading payday loan companies to the Competition Commission later this week. The commission has the power to regulate payday products so that they become more competitive in the marketplace. They also possess the power to ban short-term lending outright.
Tips for Comparing UK Payday Loans
Choosing among different lenders, services and fees can be confusing. How do you find the best payday loan deal? Share your best tip in the comments below.