What's the APR of a ‘pint to say thanks for the c...

[MSE Lawrence]

Poll between 10-16 March 09:

What's the APR of a ‘pint to say thanks for the cash’?

If someone lent you £20 and said "pay me back in a week, then buy me a pint (£2.75) and we’re sorted", what’s the equivalent APR?

Note: Thanks to Tony Levene’s guardian piece for inspiring this. To calculate the APR,a compound rate has been used.

You’ll find the answer by clicking the ‘Discuss Poll’ link AFTER you’ve voted.

A. 13.7% - 31% (3033 votes)
B. 82% - 6% (611 votes)
C. 275% - 12% (1176 votes)
D. 137% - 11% (1069 votes)
E. 2,750% - 17% (1665 votes)
F. 13,700% - 9% (922 votes)
G. 82,000% - 7% (671 votes)
H. 275,000% - 4% (371 votes)
I. 1.37 million % - 4% (406 votes)

Voting has now closed, but you can still click 'post reply' to discuss below. Thanks

PLEASE VOTE BEFORE YOU ANSWER.

TO FIND OUT THE ANSWER...

CLICK YOUR MOUSE TO HIGHLIGHT THE WHITE GAP JUST BELOW THIS AND IT WILL APPEAR.

Spoiler (highlight below to view):

Martin’s Answer and Explanation: The correct answer is G. Just over 82,000%. This is based on the fact that £2.75 on £20 is a 13.75% a WEEK interest rate. If that were to continue for all 365 days in the year including compound interest, the rate is just over 82,000%, meaning you’d owe over £16,000 (820x£20)

Now of course, the compounding of this is questionable. It assumes that because you must buy a pint if someone lends you £20, you would thus buy a pint and a half if someone lent you £30. Yet in reality it doesn’t work that way, it’d probably be just another pint. However if we focus on a pint as costing £2.75, and assume its a monetary value then the question works.

The aim of this question is to show the confusion around APRs and the real costs of borrowing. Many people often talk about 1,500% APRs being hideous, whereas actually if you’re borrowing over a day it may only be a few pence, something people would say is reasonable, whereas over 10 years it’d be crippling.

For more on this read the How interest rates work guide.

[hermoine]

So what is the right answer then?

Lol

H

[scottn]

^^^


...

[savvykaz]

To find the answer

Click in the white space, hold the click and drag the mouse down

(sorry I amended this so not to give the answer away too high up the thread - martin)

[McSaver]

I got it correct - although I had the answer as 83,073 % based on a year being 365.25 days

[prismcat]

I've got it right, as well. It's 82,593% for 365 days.
It so many people vote for (A) 13.7% ... naive ...

[purplegaily]

Wow, that's scary - I actually went too far and went for H.

I wasn't going to work out the math before 9am this morning, but recall APR's are nasty little beggars

[Thrifty09]

This reminds me of the great car tax ripoff.
The DVLA gives you the choice of paying for 12 months in one go, or 6 months now and 6 months later for 10% more. In other words you can pay 100% now, or 55% now and another 55% in 6 months' time. That works out at 49.3% APR!

[Waldir]

Originally Posted by MSE Lawrence

Now of course, the compounding of this is questionable. It assumes that because you must buy a pint if someone lends you £20, you would thus buy a pint and a half if someone lent you £30. Yet in reality it doesn’t work that way, it’d probably be just another pint. However if we focus on a pint as costing £2.75, and assume its a monetary value then the question works.

Yes, I think the compounding is more than questionable If you don't repay your friend after a week, I'm sure you'll just buy him a pint and extend the loan for another week (for another pint)
So at the end of the year you can get away for "only" 52 pints (715% APR)

[FairyElephant]

Originally Posted by teddyco

Thrifty09,

I would like to see the abolition of the car tax and only pay 'once' for the tax on a vehicle, when it is purchased new.

I think it would be more fair to abolish car tax and add it to the price of fuel! We are told car tax is to pay for repairs of the roads etc - so that way the people who used the roads more would be paying more for their upkeep!

Anyhow - back on topic - I knew the right answer but clicked vote before I put the dot in the right place, so it came out in the first option - Duh!

Still - this scenario would be cheaper than using many of the cash-machines which charge - some up to £5 per transaction and most around our way seem to be £3 - not that I ever use them though, I would have to be TOTALLY DESPERATE to do so.
Also, you get to see you mate again next week and have a social drink with them - having a good time with friends is priceless IMHO!

[engelsepiet]

....having a good time with friends is priceless IMHO!

Hey, that could make a good credit card commercial! <deadpan>

[PigDog]

Nah, you got it wrong. A IS the correct answer. The strict terms and conditions of this contract falls under the intention to create legal relations and specifically state the contract has a one week lifespan. Failure to pay before this deadline would fall outside these terms and conditions if a compound interest was to apply. At the end of the contract time limit there are no indications that another contract will be entered into.
The term APR (Annual percentage Rate) must be taken within the availible information that no other contract would be entered into in that given year.
So suck that !

[FairyElephant]

Originally Posted by engelsepiet

....having a good time with friends is priceless IMHO!

Hey, that could make a good credit card commercial! <deadpan>

...maybe I could market it to someone ?!? Oh Darn, someone beat me to it!

Hang on - I've got another one "it's not just food....it's bl**dy expensive food!" - sorry - did I get that one wrong??????????

[~Brock~]

This reminds me of a post I made about the very same thing last year.

I must admit to be pleasantly surprised by Martin (i.e. the media) talking about interest rates in an sensible and non sensationalist manner for a change.

[toasted-lion]

Once at school I lent someone 10p and he said he'd pay me 20p the next day. That's approx 75153362648762700000000000000000000000000000000000 00000000000000000000000000000000000000000000000000 000000000000
% APR!

[toasted-lion]

Oh and PigDog, he said equivalent APR.

[orange_groves99]

Surely the APR is just 0.1375*52 = 715%

The EAR is (1.1375)^52 - 1 = 81,084% (assuming weekly compounding, which is not specified in the question)

[brightonman123]

surely drinks go under goodwilll, so no APR due?!

[daz9643]

Of course the answer is 'none of the above'. See below,

If someone lent MARTIN £20 and said "pay me back in a week, then buy me a pint (£2.75) and we’re sorted", what’s the equivalent APR?

1. Martin would pay the money into an instant access account paying 4%.

2. He would then head down to J D Wetherspoons for a pint @ 99p.

3. He would then pay using a combination of cashback, 0% no fee credit cards while collecting loyalty points at the same time.

4. The interest he was earning would be used to pay off the £20 over the year and in 12 months time he would have made a tidy profit.

[daz9643]

Originally Posted by Waldir

Yes, I think the compounding is more than questionable If you don't repay your friend after a week, I'm sure you'll just buy him a pint and extend the loan for another week (for another pint)
So at the end of the year you can get away for "only" 52 pints (715% APR)

I wonder if I could suggest this to Littlewoods ? They are in Liverpool so they may go for it.