I'm always paying, never make it, but you can't look back

[venta]

So, sums. I can, broadly speaking, do sums. I have a degree in maths.

However, interest rate calculations have always baffled me. Sure, if you ask me to calculate 3 months compound interest at a monthly rate of x% I know what to do. However, when it comes to real examples of mortgages and credit cards, I can't work out what the sum I need to do is. I'm still slightly baffled about the interest charged me when I was a day late paying my credit card off in full in March.

Today, the BBC carried a story about a loanshark. It includes the following statement about someone who borrowed £1000:

"...to pay £49 a week over 60 weeks, making the total amount he had to
repay £2,940 at 917% APR."

Now, if we approximate 60 weeks to a year, then surely that's an annual interest rate of no more than 294%. The quoted APR isn't even in vaguely the right ballpark.

So... have I completely failed to understand APR ? (Wikipedia's page on the subject didn't really help with the definition.) Or is the BBC publishing unmitigated wank in the name of investigative journalism ?

Edit It turns out I'd failed to understand APR, and the BBC is cleared in this instance.

Comments

[onebyone.livejournal.com]

Sure, if it turns out that on average you're more than twice as far in debt over the period. Debt costs more if you borrow more, and more if you borrow it for longer. After 3 years of a 25-year mortgage, you're almost as much in debt as when you started, and you're still paying for that debt. APR tells you how much your debt costs per pound per year, rolling in any one-off charges. That seems straightforward and fair to me.

If you use an offset mortgage and voluntarily pay the money back in 36 equal instalments, then you'd pay less than the car loan iff the APR is less than the car loan APR. Conversely if you take out multiple 3 year loans over the course of 25 years to take your car debt down gradually, then it costs more than the mortgage iff their combined APR is higher.

I think lenders do also have to offer breakdowns of the total amount paid, which should help people decide how long a term they want to repay over, if offered multiple loans with different repayment periods. But fundamentally, as long as you have something worthwhile you can do with money, it's better to have a loan over 25 years than one over 3 years, which is why it costs more in total. If you don't have something worthwhile you can do with money, you should aim to be debt-free. APR gives a good idea what "worthwhile" means - does the cost each year justify continuing the debt another year?