MMost of us know that payday loans can be a horrifically expensive way to borrow money, with Wonga.com charging interest rates of 4,000% APR or more. But if you thought that was as bad as it gets, take a look at the loan agreement sent to Adam Richardson and the APR listed: a jaw-dropping 16,734,509.4%.
This is not a misprint. His contract does stipulate that the annualized interest rate on his loan is over 16 million percent.
Richardson, 25, freely admits he was desperate for money at the time to fund his “excessive” consumption of alcohol and cannabis. Having exhausted other sources of money, he went online and took out an £80 loan from a company called Capital Finance One (not to be confused with credit card giant Capital One).
His contract shows he agreed to borrow the money for 10 days and then repay a total of £111.20, with various charges coming into play if he missed the repayment date.
Cases like Richardson’s will intensify calls for a cap on the total cost of credit, to avoid some of the problems campaigners say payday loans are causing.
Earlier this month the Fair Trade Office gave the top 50 payday lenders 12 weeks to change their business practices, after uncovering widespread evidence of irresponsible lending and legal violations.
Stella Creasy, the Labor MP who has pushed for better regulation of the sector, said: ‘This is a great example of the fact that we are one of the few countries in the world where you can charge whatever you want to lend money to people. with all the consequences that come with that.”
Richardson passed a copy of his deal to Guardian Money because, he says, he wants people to know that while media reports often refer to payday lenders charging four-figure rates, under the radar, he there are less prominent lenders whose rates are much higher.
He says Wonga, the most well-known payday lender, with a reported representative APR of 4,214%, “seems almost angelic” compared to the company he borrowed from (he repaid the loan). Capital Finance One has since changed its name and now operates as CFO Lending from a base in Woodford Green, North East London – not far from the Creasy constituency of Walthamstow.
It seems almost inconceivable that an APR could reach such a high level, so Guardian Money sent the agreement to an expert in the field, who told us: “I checked, and the APR in the contract of your case study is correct.”
Richardson, who is now “clean and sober”, says he took out the loan in April 2011. He says that at the time “my excessive alcohol and cannabis use took quite a bit of money out of me. I had exhausted all the money flows that I had from other sources.”
Richardson adds, “I think payday loan companies primarily target this vulnerable sector of the market.
“They tend to be desperate individuals with little financial security and bad credit history that are at the point where, due to a crisis or addiction, they’re probably in no condition to sign a contract, or even to read it and understand it.”
The Financial Conduct Authority, the city’s new watchdog succeeding the Financial Services Authority, will have the power to set an interest rate cap on payday loans and restrict their term and the number of times they can be rolled over. But a decision on whether this will be invoked won’t be made until 2014, at the earliest.
Payday loan companies have argued that part of the problem is that the APR – the annual percentage rate, which companies are required to display – was originally designed to compare the cost of loans or the balances of cards over several years. On its website, Wonga states: “The equation not only multiplies the actual interest period up to a term of one year, but also compounds it, assuming that the interest on the interest multiplies many times The result is a grossly distorted number that bears no relation to the real interest at stake.”
Russell Hamblin-Boone, CEO of the Consumer Finance Association (CFA), which represents many payday lenders, told Money: “Clearly we do not condone APRs at this rate, but it is important to distinguish between the price of the loan and the annual interest No one will ever pay that annual rate of interest on a short-term loan from a CFA member, because their loans cannot be extended more than three times.”
Money emailed and phoned CFO Lending — who is not a member of the CFA — for an explanation, but he did not respond. Its website shows a representative APR of 4,414%.
Richardson, who lives in Durham and is a student, declared himself bankrupt in March 2012 after racking up unsecured debt of around £25,000, and says he feels lucky compared to others. “I’m fine today – I’m going to be released from bankruptcy this Thursday and I have some hope for the future. I certainly accept a lot of responsibility for my side of things and I’m all in I agree that restrictions should be placed on me, but it’s just disturbing to know that companies like this exist and seem quite hidden.”