Are you APR aware? Poll results & discussion
Comments
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I don't think this thread is about APR at all. It seems to be more about semantics.
I voted 10%
The terms of the loan were repayment the following day of an additional £1.
Therefor to all practical purposes the APR is 10% because of the limited payback period of the terms. Although If I were pedantic - no actual APR has been set at all, just a set additional payback amount.
Martin - the ANNUAL aspect of the APR has no meaning if the set terms are for one day. Therefor the Annual percentage rate is exactly the same as the daily percentage rate because there is no option of paying later than a day after the loan has been taken out.
I don't think any other conclusion can be reached from the original wording of the question.
You say potato and I say
Let's call the whole thing off - I got better things to do with my time.
:wall:0 -
I thought initially flat rate 10% and APR 3650%.
I'll cheat and ask my neighbour, an accountant at PKF.0 -
According to the Guardian, there are 10 different ways used to calculate APR
http://www.guardian.co.uk/science/2004/mar/18/thisweekssciencequestions3
So the answer is probably whatever you want it to be. And if it looks too high, you just change your assumptions.
Here's another one - you don't borrow anything else from your friend for another 10 years. So the total cost of borrowing over 10 years is £1 on a loan of £10. therefore APR is 1%. Let's put that in our advertising.0 -
What are you people all talking about? You borrow £10. You pay back £11. One year later you've paid £11 back on a loan of £10. That's 10% according to my school-boy maths. What other answer could there be?
Think about it another way: You need to borrow £10 for one day. A friend offers to lend you the £10 and asks to be repaid £11 the next day; you then go to a bank and they offer you a £10 loan, at i% APR, which you may pay back whenever you like.
The question can be rephrased as follows: "Given that you will definitely pay back the loan the next day, what APR will mean that both options are equally expensive?"
Option 1: repay £11
Option 2: repay £10 x (1 + i) ^ (1/365)
If both options are equal:
11 = 10 x (1 + i) ^ (1/365)
1.1 = (1 + i) ^ (1/365)
1.1 ^ 365 = 1 + i
So,
i = (1.1 ^ 365) -1
= 1.28 x 10^15
= 1.28 x 10^17 %
(You may also like to think about a different example to draw a parallel: Suppose you get paid a monthly salary of £2,000; your annual salary is £24,000. If you leave after one month, your salary was still £24,000 p.a., not £2,000.
Similarly, if you are paying daily interest of 10%, regardless of the length of the loan, you are effectively paying 10^17 % APR. Whether the loan lasts one day, one year or 100 years is irrelevant.)0 -
Poll ran between 08-16 Oct 07. Results
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)
This vote has now ended, but you can still click reply to discuss below. Thanks to everybody that voted
A full explanation of the post is in the first post0 -
Pah, only 10% a day? That's nothing...
A guy at work often borrows cash from me a few days before pay day. I usually lend him £10 and get £15 back, or £20 and get £30 back...
That's 50% interest (I wonder what the APR works out on that!) and do I feel guilty...? No, coz the guy is a prize twerp!SKIPS STONES FOR FUDGE0 -
What I gather from this thread is that we need to ask how often the interest is compounded if it isnt shown in the small print, on any loan we care to take out and the quoted APR means nothing (compared to the kind of compounding used) when money is borrowed over a long term?
Does that sound about right Martin?
and in this case, interest was compounded daily?
Thanks0 -
I don't actually think that this example illustrated the point intended very well. The main game that lenders play with APR is to give you a low rate and high charges. The charges can be spread over 25 years to make the APR look low, but if you re-mortgage again in 2 years your actual costs are far higher than you would expect based on the APR.
My answer was based on the following assumptions:
1. there is no indication that you will pay another £1.10 if you don't pay till day after tomorrow, so interest is not compounding.
2. there is no further borrowing facility implied.
So my calculation was that the only cost over a year would be £1 on a £10 loan.
I did do a bit of Googling to find how APR is defined, but failed to find a common definition. This is odd, as lenders have to advertise the APR, so you would think there was a defined way of calculating it. It would be useful if anyone could provide a definition of APR.0 -
I did do a bit of Googling to find how APR is defined, but failed to find a common definition. This is odd, as lenders have to advertise the APR, so you would think there was a defined way of calculating it. It would be useful if anyone could provide a definition of APR.
I'll try but it can get quite technical.
For a simple loan, the actuarial definition of APR is as follows:
"The APR is the rate of interest at which the present value of the amount borrowed equals the present value of the repayments (including all other charges)."
We say that the initial amount was borrowed at time 0. For an APR of i%, the present value of a repayment (or further borrowing, or a charge) of amount A, t days later is:
A * (1 + i) ^ (-t/365)
In our example we have:
Amount borrowed: £10 at time 0;
Amount repaid: £11 at time 1.
The present value of the amount borrowed is £10; the present value of the repayment is £11 * (1 + i) ^ (-1/365).
The APR is the value i for which
10 = 11 * (1 + i) ^ (-1/365).
This is the value calculated previously.0
This discussion has been closed.
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