Are you APR aware? Poll results & discussion

Former_MSE_Lawrence

The following Poll ran between 08-16 Oct 07..... The Results are included

How good is your knowledge of APRs? If someone lent you £10 and said: "give it me back tomorrow and a pound on top", roughly what Annual Percentage Interest Rate would this be? (don’t use a calculator, go on instinct).

A. 1% - 4% (367 votes)
B. 5% - 2% (162 votes)
C. 10% - 34% (2977 votes)
D. 25% - 2% (134 votes)
E. 50% - 4% (360 votes)
F. 100% - 4% (384 votes)
G. 250% - 3% (285 votes)
H. 500% - 7% (648 votes)
I. 1,000% - 23% (2055 votes)
J. 1,000,000% - 10% (902 votes)
K. 10 billion % - 2% (140 votes)
M. More than the stars in the sky - 5% (403 votes)

What's the answer? Explanation from Martin:

This poll asked “if someone lent you £10 and said give me £11 back tomorrow’ what would the Annual Percentage Rate be? A third of you thought the answer was 10% and another third 1,000%. Yet only 5% got it right, the correct option was ‘more than the stars in the sky’ as the answer’s 1,283,305,580,313,352% APR.

This is because £1 on £10 is a 10% daily rate, compounded over a year and this escalates massively. Yet this confusion is a worry. While borrow for a short time and a high APR is cheap, the real danger is borrow for a long time and a low APR is expensive. It’s this bit of maths that consolidation lenders use to say “it only costs 10%” yet as you’re borrowing over 25 years you’ll repay a fortune.

Comment or discuss by clicking reply

This vote has now ended, but you can still click reply to discuss below. Thanks to everybody that voted. Remember some of the earlier comments were made while the vote was still running.

Liney_2

Ooo I want to know the correct answer now...

ajgunn

I had a guess at 1000,000 but then worked it out - geeeeeeeeeeee !

ajgunn

I might be wrong but daily rate is 10% so APR is 100*[(1+D/100)^365-1], where D is the daily rate so 100*[1.1^365-1] = 1.28E17, that's 128,000,000,000,000,000% !!!! Lots of stars in sky.

steviebilbo

I reckon its 10% per day :eek: so thats 10 to the power of 365 or in other words ... 10 x 10 another 364 times and that really is as much as there are stars in the sky. Lending at that rate is a business I really would be interested (no pun intended) in!

:beer:

ajgunn

That's 10 to the power 348 more than me. Even for some store cards that's way over the top !!

Coveredinbees!!!!

I went with 1 million as I didn't know how to actually work it out. In retrospect a rubbish guess

MrLew

Wow, just shows how little we know ! (me included).

I guessed at 1000% (without compounding the interest which i guess is wrong) but when compounded the answer is astronomical (literally):

128,330,558,031,335,000%

So the answer must be M - more than the stars in the sky

This means if you didn't pay them back for a year you would owe them:
£12,833,055,803,133,500


Even if the interest rate was 1% per day the APR would equate to well over 3,000% ! and the debt at the end of the year would be £378

Anyone wanna borrow a tenner off me at 10% interest per day ?

redux

almost but not quite as bad as the one about doubling for each square on a chessboard

pkempc

If the £10 debt was repaid with £1 interest on top after one day then the flat rate of interest is 10%.

If, over the course of a year, that single £10 for a day was all you borrowed and you only paid the single £1 interest charge then the Annual Percentage Rate is £1 ÷ £10 = 0.1 x 100 = 10% APR.

However, if immediately after repaying the £10 you then borrowed another £10 and paid that back the next day with £1 interest and then repeated this every day for the next year then you would pay a total of £365 (£366 in a leap year) in interest for a daily loan facility of just £10.

The Annual Percentage Rate could then be calculated as £365 ÷ £10 = 36.5 x 100 = 3,650% APR.:think:

However, this APR figure doesn't take into account any compounding of interest, loan application fees, reservation fees, fees for not paying by direct debit, penalties for late payment or early settlement, loan discharge fees or any other fees the lender can get away with!

teddyco

I can't believe 47% of the people said it was an APR of 10%.

Maybe that's why so many folks don't bother to read the fine print of most
banking contracts and they continue to get 'slammed'!