Yesterday, the Advertising Standards Authority upheld 31 complaints against a Wonga advert. It concerned the always-controversial Annual Percentage Rate.
What did Wonga do?
In the advert, a Wonga character discussed the costs of Wonga loans and explained that ‘some people think they will pay thousands of percent of interest’. This was because of the 5853% APR that Wonga has to display on the majority of their advertising. The ASA found that the adverts were misleading and irresponsible.
Yet, they also agreed that APR was “not necessarily the most helpful indication of the actual cost of a short-term loan if it was repaid on the agreed date.”
So what’s actually the situation here? Well, first it’s worth understanding – what is APR?
APR (annual percentage rate) indicates the rate of interest if you took a loan out for a full calendar year. For a loan that’s designed to be paid off within a month, this means multiplying and compounding the interest rate to show an annual rate.
One effect of this is that the shorter the amount of time a loan is taken out for, the higher the APR. This isn’t an easy thing to explain, nor is it an easy thing to understand. But here’s a simple example:
- £100 with 25% interest for 20 days has an APR of 5785%.
- £100 with 25% interest for 10 days has an APR of 345,348%.
We do think that this can be confusing, as some people think that we’re a lender because they think that only lenders show APRs. And since we already show the lenders’ APRs, it can be even more confusing.
But European law requires us to state this. So what benefit does the customer actually get from us showing it?
To an extent, we agree with Wonga. APRs can be confusing and it’s important to let customers know what they’re actually likely to repay.
This is particularly relevant now, as new regulations have put a cap on the number of times a loan can be rolled over.
In the past, some lenders have tried to encourage people to roll over loans several times. In these cases, the short-term loan rolling over a year may have been possible. But now, it’s no longer possible or legal to charge somebody for a year of payday loans.
Yet, Wonga implied that the APR was ‘irrelevant’, and did not show it prominently enough throughout the advert. As a result, they fell foul of the guidelines, even though the information they showed about their loans was accurate, and may have helped people understand what they would actually pay back in a better way than the APR.
Getting people to discuss the actual cost of payday loans can be difficult – and we don’t think that APRs are the most helpful way to do it. But we accept the European Directive that means that we have to show it. We just think that it would be useful if more people understand why APRs are shown as well as how they actually work.
Do you have any suggestions for how the costs of loans should be explained to customers? Let us know in the comments section below.