When dealing with numbers it's easy to choose your words to bewilder those with low numeracy skills. In the UK at the moment there is an advert, aimed at students, from a money lending company. They state no a.p.r but their sample scenario is that to borrow £70 for five days will only cost £9.20. Even with no compounding this equates to 960% a.p.r.

Does nobody ever stop to do the maths or are they so desperate for short term cash that they don't care?

I wonder if people would be so keen to borrow if the rate was actually stated in clear words in the advert.

I thought it was a legal requirement in Englanbd to state the APR of loans.

Doesn't seem to be in that advert although there is a reference to the company's web site where the apr is probably mentioned.

I have no idea what you're talking about. I guess I'm the audience for this ad.

Where can I buy a couple of whatever they're selling? Sounds like a deal to me.

It sounds like our payday loans. They have a huge interest, and I don't know how they get away with it.

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Originally posted by goofy:
I have no idea what you're talking about. I guess I'm the audience for this ad.

Annual percentage rate.

WM

quote:

Originally posted by goofy:
I have no idea what you're talking about. I guess I'm the audience for this ad.

APR, or Annual Percentage Rate, is the amount you would pay in interest were you to only pay back the loan after a year. Thus an APR of 960% means that, if your were to borrow £100 for a year from this lender, you would pay back the £100 plus £960 interest - a total of £1060.

Since the Bank of England's base rate is now down to 0.5% (from memory) and you can get a loan from a proper bank for around 5%, this is not what most would consider to be a good deal.

But the reason they get away with it is because many people are simply inumerate and so bad at dealing with money that they get caught by these kinds of "loan sharks". Unfortuntely it is usually the most vulnerable people who are trapped; you need only to look at where loan sharks advertise to appreciate the truth of this. Always in down-market newspapers like "The Sun" or in the commercial breaks of TV soaps and the like.

And, as Bob remarks, in student media since students, although not usually stupid, as often unaware of the demands of managing their finances, having often been insulated from such realities by the "Bank of Mum and Dad".

This message has been edited. Last edited by: Richard English,

And, of course, because these quick turn round, very short term loans (such as seventy pounds for five days, needed immediately) are virtually impossible to organise with a conventional bank.
That's why money lending companies are on the rise.

Incidentally, as I'm typing this, the advert has just aired again and this time I went close to the screen and read the very small print. Guess what? The APR was quoted, it is compounded so my estimate was way off. It's a truly staggering 2689%.

So, in Richard's example you would borrow £100 and pay back £2789 if you left it for a year. Of course the debt collectors would probably be round long before it reached that much.

This message has been edited. Last edited by: BobHale,

Of course my original point was partly about language. The language used to describe numbers can be manipulated in very devious ways. This example is unusual in that an actual cash value is being used to disguise the percentage figure. The other way round is much more common, especially in the press and even more especially in reporting of science.
We routinely see instances in the press of quoted figures along the lines of "eating x causes a 25% higher risk of cancer"* and this, as stated is entirely meaningless. The figures are usually abstracted from scientific papers which have details of exactly what the quoted figure means and how it was derived but the newspapers very rarely bother with that because good science doesn't make for good sound bites.
What they do with quoting statistics like this is use the "relative risk increase" which is a very misleading figure. What they need to do is quote the "absolute risk" or the "absolute risk increase".

In the example above 25% sounds quite dramatic but if the sample size was 1000 and in the population not eating X four developed cancer while in the sample eating X five did then the absolute risk has has gone from 0.4% to 0.5% an "absolute risk increase" of 0.1%, or one in a thousand, which isn't even statistically significant compared to the background level.

This 0.1% is EXACTLY the same figure as the previous 25% but described using a much less dramatic, and much more easily understood, figure. Words and mathematics sometimes make very uneasy bedfellows, especially when mediated by the people with a vested interest - be it the vested interest of a loan company wanting to make money or a journalist wanting to sell papers.

(*Incidentally I chose this example because one of the books I read suggested facetiously that the newspapers are engaged in a process of dividing every substance on Earth into two groups - ones that cause cancer and ones that cure it, in the case of at least one of our National papers in the UK we get an X causes/cures cancer story, pretty well every week.)

This message has been edited. Last edited by: BobHale,

The point about language is a very salient one. Loan sharks (now there's a bit of emotive language!) use such terms as "helping you out" - when, of course, their kinds of loans don't really help anyone except themselves. You can't get out of debt by borrowing money!

Of course, borrowing is more or less a necessity in our modern way of life - few people could manage to buy a house without taking out a mortgage - but planned borrowing as part of a lifestyle choice is very different from borrowing simply to try to get over a crisis caused by poor financial management.

quote:

Originally posted by Richard English:

quote:

Originally posted by goofy:
I have no idea what you're talking about. I guess I'm the audience for this ad.

APR, or Annual Percentage Rate, is the amount you would pay in interest were you to only pay back the loan after a year. Thus an APR of 960% means that, if your were to borrow £100 for a year from this lender, you would pay back the £100 plus £960 interest - a total of £1060.

OK, but I don't see what that has to do with borrowing £70 for five days and only costing £9.20.

I don't get on well with numbers. Give me a phone number to read out loud, and I will most likely read it out wrong.

£9.20 is 13.1% of £70
13.1% in five days is 960% in 365 days.

That's assuming that there is no compounding of the interest (that you don't pay interest on the interest).

I'm not sure of the calculation if it is compounded but the stated rate from the company is 2689%.

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OK, but I don't see what that has to do with borrowing £70 for five days and only costing £9.20.

It's simply a way of giving a standard scale for comparison of costs, to help those who, like yourself, find figures difficult.

There are many ways of expressing prices of just about anything (is 500ml costing CAD3 better value than an American pint costing CAD3 or an Imperial pint costing CAD3.05?) Converting everything to a standard gives an easier way to compare value. An APR of 5% is good value; and APR of 100% is less good value; and APR of 2000% is very bad value.

The problem is that many people just look at how much a thing costs, not how good its value is - and thus many resellers use deceptive combinations of quantities and prices to deceive such people. For example:

"Hey, that's a good price - only $3 for that 6 inch pizza - much better value than that 10 inch pizza that costs twice as much".* Many people would be deceived by this combination, since 10" is obviously far less that twice 6" - and it's a combination of only two values - diameter and price. But it needs a fairly complex mathematical calculation to determine the true value (which few people would inclined or able to do when standing in line at a pizza takeaway). If all pizzas were sold by the square inch - a standard unit - then customers would not be confused.

*Here's the calculation:

Area is Pie R squared (I fear I don't know how to show mathematical symbols on a pc) so the 6" pizza is 3 x 3 x 3.142 equals 28.279 square inches of pizza costing $3 - which is nearly 11 cents per square inch. But the 10 inch pizza is 5 x 5 x 3.142 equals 78.55 square inches of pizza costing $6 - which is less than 8 cents per square inch. Twice as much money to buy but far better value.

quote:

Originally posted by Richard English:


Area is Pie R squared (

Was that intentional?

quote:

Originally posted by BobHale:
£9.20 is 13.1% of £70
13.1% in five days is 960% in 365 days.

960% of what? And you're paying it back in 5 days, right? So why is this relevant?

At one time in the US, assessing anything over about 8% annually on a loan was called "usury" and was a felony in most states. Now most people would be happy to get that rate.
Bob's figures show what these people are charging if you paid it off in a year instead of five days. You might think the payback short-term is not bad until you find out what you'd have to pay out in the longer term.

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Area is Pie R squared

Interesting typo when referring to pizza! Yes, I know that pizza is not a pie.

Pi is better known to students as π although the sans-serif font used here makes it look a little different.

Pie are round;
Cornbread are square.

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Interesting typo when referring to pizza! Yes, I know that pizza is not a pie.

In fact I tried to post the pi sympol from Word - but it came out as "P".

Maybe I should have used some other example - but that pizza one is so commonly seen...

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960% of what? And you're paying it back in 5 days, right? So why is this relevant?

It's relevant simply as an indicator of value. Value isn't everything but it is important.

A single red rose costing $10 in a restaurant, that you give to your partner, isn't good value in absolute financial terms when you could get a whole bunch for that cash in a florist or a whole bush in a nursery. But it might be good value in other terms at that place and at that time.

But people should be able to compare values and worth and that is not always easy to do when dealing in finance. APR is simply a way to help people to do that when they are borrowing money.

OK.
Without having an apr quoted which of these is the better deal.

£70 for five days with a charge of £9.20
£75 for four days with a charge of £8.60
£50 for fourteen days with a charge of £11.70

Without a basis for comparison the loan companies can trick you into insane rates of interest.

You also need a way to work out how rapidly your payments will escalate if you default on any payments.
As you say, you seem to be their ideal customer. Can I offer you a loan?

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Can I offer you a loan?

Not so fast. I saw him iirst.

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960% of what? And you're paying it back in 5 days, right? So why is this relevant?

Well, I do see goofy's point. If you are borrowing so that you can make it to your next payday (let's say for 5 days), and then you pay it back immediately, it's really more of a convenience charge than an interest charge. However, it often happens that people don't pay it right back. Something comes up, they wait, something else comes up, and so on and so on. Pretty soon they owe $100 on a $50 loan. They can't pay that, so they borrow again, and it starts all over...

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£70 for five days with a charge of £9.20
£75 for four days with a charge of £8.60
£50 for fourteen days with a charge of £11.70

Dredging back through the memories of over half a century, I have a feeling I would need to find something called the LCM and then multiply by the appropriate factor in order to do this calculation. I recall I did eventually master the technique even in those days of £sd and manual calculations.

But even using a calculator and with decimal currency it's certainly not a calculation that most would even know how to do - let alone have the time and patience to do. I think the Law that states the APRs must be shown is a very good one.

As I have mentioned in previous postings, we also have Laws about prices for food and drink sold in shops, which, however they are shown on the tin, bottle or package, must also have the price per kilo or litre shown on the display.

Thanks for your explanation, Richard. I think I get it now.

The language used in ads can be extremely misleading. A company is advertising on TV offering a gold coin -- a replica -- similar to a coin no longer produced by the mint.
The company goes to great lengths to emphasize the original coin's history and its increased value due to the heightened price of gold. And they state the (original) gold coin will continue to increase in value as gold prices rise.
But then they smoothly shift to and begin to discuss their fake coin in the same tone and manner as the first. Someone not paying close attention would assume the knock-off has the same value as the official coin but it doesn't. It's a gold-plated imitation with perhaps ten cents worth of the precious metal on it. They are emphatic that the $19.95 price can only be guaranteed for seven days (even though the commercial has been running for several months already) and limit you to four purchases.
I can't wait for mine to arrive.