About APR
A common way to compare the cost of personal loans and credit cards is looking at the APR, or annual percentage rate. As the name suggests, APR is an annual measure and great when comparing annual products but not so informative when describing short-term cash advances such as ours which are for between one day and a month.
Our policy has always been to show you exactly how much the loan will cost before you apply and we're going to continue to do this as we believe this is much more meaningful when it comes to short term cash advances. We believe in giving you all the facts and letting you decide what's good value! You are welcome to compare APR, but it's a bit like trying to work out if catching a black cab into town is worth the expense when being told how much it would cost to do every day for a year.
It’s not exactly the most useful way to assess the cost of a short-term solution is it?
If you’re still confused about Representative APR and the cost of a Wonga loan, read on to find the answers to common questions we receive on the subject:
Why has your APR gone up so much? It used to be 2,689% and now it’s suddenly 4,214%
Nothing has changed in the way we charge for our service. What has changed is that a new European consumer credit directive has made changes to the way in which the APR is calculated. The fact the APR associated with our service almost doubled, and yet the cost is the same, we believe goes to show what a confusing measure it can be.
Is your service more expensive now?
No, nothing has changed in how much, or the way we charge for our service. Only the APR calculation has changed.
What is the difference between Representative APR and Typical APR?
Typical APR was the APR at which at least 66% of loans provided by a lender. This has now been replaced by a Representative APR, based on at least 51% of loans provided. Whilst this has had a slight impact on the APR, the biggest impact has resulted from the actual calculation.
Why is your Representative APR so big?
The APR measure was designed to help compare the cost of traditional loans or credit card balances which are taken over 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 grossly distorted number that bears no relation to the real interest we charge.
How can you justify charging thousands of percent in interest?
We don’t charge that amount of interest, or anything like it. Our annual rate of interest is 360% per annum which, whilst not the smallest, is not reflected by the APR.
But it’s still a massive APR!
The Representative APR bears absolutely no relation to the interest we charge. It’s simply the wrong measure for loans of a few days or weeks, but it’s a legal requirement. That’s why we always calculate the total cost of repayment too, which we believe – and our customers tell us - is the most important piece of information when considering a short term loan.
But if my loan was over a year, the theoretical cost would still be astronomical
It is impossible to borrow money from Wonga for a year. Not even close to a year. The maximum loan is a month. Even if we were to launch a year-long loan at the same interest rate we charge now, the APR would be reduced dramatically - because there would be no multiplying and compounding of actual interest. This further illustrates how APR is a nonsensical and confusing measure for the sort of loans we offer.
What about people who are in arrears?
If a customer goes into arrears, interest continues to accrue at the same rate it did when the loan was taken. However if they contact us and work with us, our first priority is to try to agree a sensible repayment plan as quickly as possible, which often involves us freezing any further interest.
Based on APR, you’re still the most expensive short-term lender
Just because we have one of the highest Representative APRs, it may not mean we are the most expensive. If we wanted to reduce our Representative APR, we could insist upon you borrowing larger amounts for longer periods which would cost you more money (because bizarrely, the shorter the length of the loan and the smaller the loan amount, the higher the APR!) However, we're determined to continue to provide the same fast and flexible service we always have which allows our customers to be in control. This means we'll continue to provide shorter loans than payday lenders and our APR will therefore be much bigger. To be certain you're getting the best loan and not being misled by APR, you should always check the full cost of repayment when considering short-term loans of less than a year.
Only someone desperate would consider a loan with such a massive APR
We calculate and display the full cost of repayment very clearly, as we believe this is the information our customers really value. We also use our own sophisticated technology to make instant yet responsible lending decisions, based on extensive publically-available data. We decline around three out of five first-time applicants. A typical Wonga customer earns national-average wage and has access to traditional credit alternatives. Our customers tell us they prefer the transparent, flexible and short-term nature of our loans, plus the speed and convenience of our online service.
Convenience
Finally, remember we are able to deliver instant money when you need it – cash on demand. There are cheaper ways to borrow, but none as quick or flexible as a Wonga cash advance. Just as in our black cab scenario, in many other areas of life, it can make complete sense to pay a premium for guaranteed speed and convenience.