Most of us know that payday loans can be a horrifically expensive way to borrow money, with the likes of 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 stated APR: a mind-boggling 16,734,509.4%.
That is not a misprint. His contract really does state that the annualised interest rate on his loan is in excess of 16 million per cent.
Richardson, 25, freely admits he was desperate for cash at the time to fund his “excessive” alcohol and cannabis usage. 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 pay back a total of £111.20, with various charges coming into play if he missed the repayment date.
Cases such as Richardson’s will intensify calls for a cap on the total cost of credit, to prevent some of the problems that campaigners say payday lending causes.
Earlier this month the Office of Fair Trading gave the leading 50 payday lenders 12 weeks to change their business practices, after it uncovered widespread evidence of irresponsible lending and breaches of the law.
Stella Creasy, the Labour MP who has been lobbying for better regulation of the sector, says: “It’s a great example of the fact that we are one of the few countries in the world where you can charge what you like to lend people money – with all the consequences that come as a result.”
Richardson forwarded a copy of his agreement to Guardian Money because, he says, he wants people to be aware that while media reports often refer to payday lenders charging four-figure rates, below the radar there are less high-profile lenders whose rates are much higher.
He claims that Wonga, the best-known payday lender, with a stated representative APR of 4,214%, “seems almost angelic” compared to the firm he borrowed from (he repaid the loan). Capital Finance One has since changed its name and now trades as CFO Lending from a base in Woodford Green, north-east London – not far from Creasy’s Walthamstow constituency.
It seems almost inconceivable that an APR can reach such a high level, so Guardian Money sent the agreement to an expert in the field, who told us: “I’ve checked, and the APR in your case study’s contract 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 use of alcohol and cannabis demanded quite a bit of cash. I’d exhausted all the streams of money I had from other sources.”
Richardson adds: “I feel that payday loan companies are targeted primarily at this vulnerable sector of the market.
“They tend to be desperate individuals with little financial security and poor credit histories who are at the point where, due to crisis or addiction, they are not likely to be in a fit state to sign a contract, or even read and understand one.”
The Financial Conduct Authority, the new City watchdog taking over from the Financial Services Authority, will have the power to set an interest rate cap on payday loans, and restrict their duration and the number of times they can be rolled over. But a decision on whether this will be invoked will only be made in 2014, at the earliest.
Payday loan companies have argued that part of the problem is that the APR – the annual percentage rate, which firms are obliged to display – was originally designed to compare the cost of loans or card balances over several years. On its website Wonga says: “The equation not only multiplies the actual period of interest up to a year’s duration, but also compounds it, assuming interest-on-interest many times over. The result is a grossly distorted number that bears no relation to the actual interest involved.”
Russell Hamblin-Boone, chief executive 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 on it. Nobody will ever pay that annual rate of interest on a short-term loan from a CFA member, as their loans cannot be extended more than three times.”
Money emailed and phoned CFO Lending – which is not a CFA member – for an explanation, but it did not respond. Its website displays a representative APR of 4,414%.
Richardson, who lives in Durham and is a student, declared himself bankrupt in March 2012 after amassing unsecured debts of around £25,000, and says he feels lucky compared with others. “I’m OK-ish today – I’m to be discharged from bankruptcy this Thursday and have some hope for the future. I certainly accept a large amount of responsibility for my side of things and I totally agree I should have restrictions placed on me, but it’s just worrying to know that companies like this exist and seem quite hidden.”