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Payday Loans APR vs £25 per day overdraft charges
henrik1971
Posts: 202 Forumite
in Loans
Has anyone looked at the MSE news article about this?
Am I going mad? They are comparing Payday loans at 5000% APR against Clydesdale Bank at £25 per day fee, even if you are only overdrawn by £1, and saying that APR is 1.77 billion billion......percent.
I had to think about this for ages - stay £1 overdrawn for a year and pay £25 per day interest = £9125 interest on a £1 principal sum, so surely it should be 912500% APR??
With a flat daily fee, there is no actual compounding effect taking place, but with a payday loan, there is daily interest, so there is a compounding effect.
Surely in a situation where no compounding effect is possible, an APR cannot and should not be calculated, as the purpose of the APR measure is specifically to reflect the effect of compounding.
Am I going mad? They are comparing Payday loans at 5000% APR against Clydesdale Bank at £25 per day fee, even if you are only overdrawn by £1, and saying that APR is 1.77 billion billion......percent.
I had to think about this for ages - stay £1 overdrawn for a year and pay £25 per day interest = £9125 interest on a £1 principal sum, so surely it should be 912500% APR??
With a flat daily fee, there is no actual compounding effect taking place, but with a payday loan, there is daily interest, so there is a compounding effect.
Surely in a situation where no compounding effect is possible, an APR cannot and should not be calculated, as the purpose of the APR measure is specifically to reflect the effect of compounding.
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