APR is mis-leading and needs reforming

Potential customers of short term loan and payday advance companies are being put off by typical APR rates, which are mis-leading, and they are legally obliged to display it.

With a increasing number of alternative lenders now available, consumers should be given a typical interest rate that is relevant to the credit they opt for, not a distorted annualised rate, which was initially created forcredit and balances taken over several years.

Surely the need for a reform in APR rates is long overdue, and a more relevant typical interest rate applied for these new alternative lenders.

The need for APR reform

Potential customers of short-term and payday advance, lending companies, such as Wonga.com, are being put off by typical APR%'s, which are mis-leading, as APR% is calculated per annum and they are legally obliged to display it.

Using Wonga.com as an example, it is easier to explain. Wonga charges the equivalent of just under 1% interest per day and that rate is applied to the loan amount and transmission fee for the period of the short term loan - usually between one and 31 days. The annual rate of interest is 360%.

Where a loan is not taken out for a year, the interest rate must be compounded the same number of times the actual loan period would fit into a year (Wonga.com always shows the total cost of repayment very clearly, with its slider bar).

As a result, Wonga.coms typical APR rate is 4214%, which sounds and looks alarming, This result is a grossly distorted number that bears no relation to the actual interest involved. An influential PWC report, UK Consumer Credit in the Eye of the Storm, said: "Annualising the interest cost of a product that is only offered as a short-term facility confuses the purpose of the loan and misrepresents the true cost."

APR was designed to compare costs of loans or card balances over several years, not for short term loans, for which it seems to be completely irrelevant. With the plethora of short term loan and payday advance companies now available, surley APR should be reformed and a new typical interest rate applied for these companies.

Example of typical Wonga.com loan; £100 over 7 days, total repayable £112.78

This can be further reduced by using www.newwongapromocodes.co.uk which helps its friends save at least £5.50 on their first Wonga loan. New Wonga Promo Codes provides Friends help, information, resources, links, Friends reviews and comments. Friends can also access other special offers by requesting them via e-mail.

The benefit of short term loan and payday advance companies should not be overlooked because of their respective APRs, instead each company should be judged on their individual merits and praised for opening up a line of credit that might not have been available to some people.

The key to making these companies a valuable source of credit, is responsible lending, ensuring to repay on time and making full benefit of promo codes and special offers to minimise your repayment.