Reuters finance blogger Felix Salmon snapped this on the tube in London:
Said he: “Yes, it really does seem to be offering loans at 1,734% interest rates.”
Well, sort of. What we’re actually seeing here is the result of new British regulations, which state:
Under the new Advertisements Regulations, if an advertisement includes an interest rate or any amount relating to the cost of credit, it must also include a representative example. This must contain certain standard information including a representative APR. The example must be clear and concise and must be more prominent than the information that triggered the inclusion of the example.
The representative APR must reflect at least 51% of business expected to result from the advertisement. The standard information must be representative of agreements to which the representative APR applies.
This is, as one might expect of a EU-inspired regulation, simultaneously perfectly clear and incredibly obscure. A British credit guide attempts to explain it:
[W]hat the BSI is saying is that because APR rates can fluctuate so wildly between individual customers, the number that is put on billboards, fliers, and other forms of advertisement must represent the APR rate that the company expects to use on over half, or 51% of the business they get from those advertisements. If they only expect to get 15% of their customers that qualify for the lowest APR rate they offer, they can’t advertise that lower rate just to bring in more customers, because in a way it can be very misleading.
This is advantageous because it really helps out consumers who are often pulled into a loan office because of a low rate they saw and then find out that they are going to have to pay nearly twice that advertised rate. Thus, the advertised figure is “representative” of the rates that the majority of their customers will be receiving. Other charges are also taken into account with the Representative APR, including balance transfer fees that were previously never included.
This is an actual offer from this specific lender:
Representative example: Borrow £50 for 30 days. The total charge for credit is £14.75. Interest is fixed at a rate of £14.75 per £50 loan (359% per annum). The Total Repayable is £64.75.
While this particular example has a 359-percent APR, close to the number you might expect for short-term “payday” loans, more than half the lender’s customers for loans of this type end up paying an effective rate of 1734 percent, for whatever reason — historically, payday loans are often late, incurring late fees, or rolled over into subsequent loans, incurring further interest charges — and presumably that’s the “representative” APR being quoted in the ad.