Leaflet through the letterbox - 739.9% APR

The results are not ridiculous. It is what happens if you roll the loan over every two weeks for a year.

As there isn't on any of the ads for Mortgage brokers in "Thompson" (none of which are likely to be dodgy).

I can't believe that there's a requirement to state your number in advertising material.

tim

apparently, there's a difference between advertising material and direct offers. also, there's no address on the leaflet and the phone number is an 0700. I /know/ the company is shady because they are operating without a consumer credit licence.

TS are on their case, anyway.

Which it was not in this case. It was a loan of 100, repaid at the end of two weeks, with interest of 25. So the rate of interest was 25% over two weeks. Simple multiplication shows that this becomes approximately 25 times 26, which is 650% per annum.

Applying "official" APR formulas to such a loan does, indeed, produce a result of the order of 33000%. This just goes to show that applying formulas blindly, without first considering whether they are truly appropriate, can produce ridiculous results - as in this case.

I wish I'd kept my gob shut now. :-)

My intention was only to show that paying 25 to borrow 100 in the short term (in a "lend me a fiver and I'll buy you a pint at the weekend" kind of way) wasn't wholly unreasonable. A bank's not going to lend anyone so little (other than as a pre-arranged, automatic overdraft), and the bang-on-your-door type money lenders are entitled to make a living, no matter how objectionable we might find it in principle and how bad it looks on paper.

Andrew McP

I strongly disagree.

The difference between 1580.4% and 1579.62% is 0.8%

Oops, that should be 0.78%

650% per annum would mean you get £650 at the end of the year, which isn't as good as getting £25 every two weeks. Getting £25 every two weeks means a yeild of 33000% or thereabouts, not 650%

I don't think it is at all ridiculous, it is a fair measure of how much the loan costs.

"B J Foster" wrote

Yes, of course, but you must think that 52.17 is a "better" number of weeks to use, considering that you quoted the answer using that to 6 significant figures. [Rather than just saying, say, "1580%".]

Can you explain why you think 52.17 is better than using, say, 52.18? [Which is actually closer to 52.17857143.]

"Alec McKenzie" wrote

...OK so far...

"Alec McKenzie" wrote

But what's the point of that?

650%pa doesn't *mean* anything for this scenario!

"Alec McKenzie" wrote

It's not just an "official formula", it's a branch of mathematics called "compound interest".

"Alec McKenzie" wrote

I agree entirely - which is why you shouldn't blindly use "simple multiplication" to get 650%!

Here's a simple question for you. If you agree to lend me 100 for two weeks, at an annual rate of interest of 650%, how much interest would you expect from me?

"Alec McKenzie" wrote

About 8 (about 0.55% per day).

At 33650%pa (ie about 1.6% per day), it would be about 25.

Simple multiplication is not the way to convert a periodic rate into an annual rate.

With low rates it can be a good approximation, or for loans (like mortgages) where you are required to pay interest periodically but not repay the capital, it can make sense to quote the rate in this way (provided you don't confuse it with the APR), as over a year this will reflect the amount of interest actually paid.

But for a fixed term loan where you repay the capital and interest at the same time, it is simply wrong to convert the rate to an annual rate by simple multiplication. It makes no sense.

Yes, but it's better than applying a formula which is simply wrong.

The charge for the loan in this case really reflects cost and risk, and shouldn't really be regarded as interest, so any formula will produce ridiculous results.

Your point was valid, if someone were to lend on that basis then the cost/risk involved could well justify a 25 charge. It's a bit silly to regard the charge as an interest rate as it's not really interest, it's a charge for the service and risk. The lender may need to take a high proportion of borrowers to court to get their money back (or employ thugs to threaten them!).

Certainly. There might be some people who'd consider 1579% to be reasonable and 1580% to be a rip-off, but I imagine that such obsessive retentive types would be quite rare.

It would seem you are applying the ideas of compound interest to your calculations. So as a matter of interest, at what frequency are you compounding the interest, and what leads you to choose that frequency?

I've seen one recently... can't think what the exact apr was but it was insane...

this was a £5 charge for £95 loan for a month...

But the loan is repaid (with interest) at the end of two weeks, so there is no question of getting 25 every two weeks!

How much the loan costs is 25.

Nor of getting 650 every year.

Exactly.