APR for loan almost four million per cent

Jan 17 2013 by John Rowbotham, Hamilton Advertiser

A Hamilton minister this week called for curbs on pay-day loan charges.

Rev John Carswell was speaking after a concerned parishioner drew his attention to a loan agreement with an APR of almost FOUR MILLION PER CENT.

The seven-day agreement for the loan of £54.16 was with Edinburgh-based Cheque Centres Ltd.

It was legal and taken out by a member of the public who subsequently sought assistance from one of the agencies in South Lanarkshire who help people manage their debt.

The borrower had to repay the amount taken out plus a loan fee of £12.19 by October 28, 2011.

According to the loan agreement, the loan fee expressed as a fixed rate of interest is 1174.54 per cent while the APR – the total cost expressed as an annual percentage of the total amount of credit – is 3,953,864.17 per cent. The company also levy a £30 ‘late payment’ charge.

Mr Carswell said both he and others in the church were becoming increasingly concerned over the way some companies were cashing in on people’s financial plight.

“People are desperate for cash and they get lured by these companies,” he added.

“They get presented with a loan agreement, much of it in tiny print.

Because you trust the people you are dealing with, you sign your life away.

“People end up with six or seven loans from pay-day loan companies are they are indentured – they cannot break out of the circle of debt.”

He believes there has to be a change in the law to protect people seeking short-term loans.

“I find it incredible that some company could legally bind you to an agreement like the one I was shown.”

A spokesman for South Lanarkshire Council confirmed that the agreement was legal and added: “These types of loans always have very high APRs.

“Consumers should realise that they are paying excessively for short term loans and should shop around for the best, or better, deals.

“Often credit unions are a better bet.”

A Cheque Centre spokesman insisted the interest rate charged on the loan was 22.5 per cent and that the most the customer would pay, even if they failed to pay back the cash within seven days, was £96.35.

He added: “This is why the legal obligation to provide an APR for short term loans is nonsense. It is a mathematical formula that works well with long-term loans, but it doesn’t make sense when applied to loans as short as seven days.

“APR is based on a customer not paying back anything for a year, and us continuing to compound interest day after day.

“But a Cheque Centre short-term loan ends on your next payday, and we never compound the interest.”

“What our customers want to know is what it will cost them in pounds and pence, and in this case it was just over £12 for a week.

“But if you used the highlighted APR as an interest rate, the customer would have had to pay back £215 million in fees over a year or on average about £4 million per week.

“The maths doesn’t make sense. We are campaigning, with other short-term lenders to provide a real cost, so that customers can compare short term loans.”