Would Newcastle have to pay back £4bn if its Wonga sponsorship was a loan?

Interest is tricky.

When Wonga announced their intention to sponsor Newcastle United FC, it generated no small amount of opprobrium. Despite the company's best attempts to generate a positive image for itself, it is still largely seen as a payday loan company, preying on the poor for a quick buck. So it was no surprise that smart a demonstration of that fact very quickly made the rounds:

Anything with over 2,000 retweets is going to get fact-checked a lot, and debates soon broke out over whether the number was accurate. Is it?

Wonga's "representative APR" is 4214 per cent. When you take out a loan with it, it decides at the beginning of the period what your interest is, and charges it to you on the total amount of capital borrowed over that period. In other words, it doesn't compound the interest - which makes sense, because it would be hard to compound anything over a loan as short month. As a result, if you were charged an annual interest rate of 4214 per cent, then at the end of a four year period you would have to pay back: 

£24,000,000 + £24,000,000 x 42.14 x 4 = £4,069,440,000.00                                 

(That's the capital, plus four years interest.) A shade over £4bn. So James Dixon is correct.

Except that the 4214 per cent APR is already compounded. As Wonga explains, industry regulations require it to present interest at an annual rate even if it doesn't make annual loans. To do this, it is required to take the amount of interest you would pay on its longest loan, a month-long one, and act as though you rolled it over, taking out larger and larger loans to pay off the interest as you go along. If we compounded Newcastle's loan similarly, then after four years it would owe:

£24,000,000 x (1+42.14)^4 = £83,125,028,034,051.84                                 

That is £83 quadrillion. It's over one hundred times world GDP, and in the ballpark for the total value of everything on earth.

But Wonga would maintain that using that interest rate is unfair. Although they are required to present their representative APR in that manner, they have never, and would never, charge it to a customer. The annual rate of interest which they actually charge is "just" 360 per cent, and the rest is made up of the compounding which they are forced to assume. If Newcastle's loan was taken out at that rate, it would have to pay back:

£24,000,000 + £24,000,000 × 3.6 x 4 = £369,600,000.00                                 

£370m is still quite a lot to pay for £24m, but it's nowhere near billions. And in actual fact, Newcastle wouldn't even pay that much. It's not a person, it's a business, and Wonga have - controversially - launched a division exclusively for lending to businesses. The largest and longest loan it offers is £15,000 for a year, which costs £19,350 to pay back, implying an APR of 29 per cent. If Newcastle borrowed £24m for four years at that rate, then if the interest compounded, it would equal:

£24,000,000 × (1+0.29)^4 = £66,461,491.44                                 

And if it was charged in one lump sum, it would equal:

£24,000,000 + £24,000,000 × 0.29 x 4 = £51,840,000.00                                 

The root of the problem is that Wonga isn't actually in the business of making multi-year, multi-million-pound loans. The assumptions we make in trying to squeeze their business model into a shape that lets us make that comparison are important, because they're the difference between paying back £52m and £83qdrn.

Front page of Wonga.com

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Metro mayors can help Labour return to government

Labour champions in the new city regions can help their party at the national level too.

2017 will mark the inaugural elections of directly-elected metro mayors across England. In all cases, these mayor and cabinet combined authorities are situated in Labour heartlands, and as such Labour should look confidently at winning the whole slate.

Beyond the good press winning again will generate, these offices provide an avenue for Labour to showcase good governance, and imperatively, provide vocal opposition to the constraints of local government by Tory cuts.

The introduction of the Mayor of London in 2000 has provided a blueprint for how the media can provide a platform for media-friendly leadership. It has also demonstrated the ease that the office allows for attribution of successes to that individual and party – or misappropriated in context of Boris Bikes and to a lesser extent the London Olympics.

While without the same extent of the powers of the sui generis mayor of the capital, the prospect of additional metro-mayors provide an opportunity for replicating these successes while providing experience for Labour big-hitters to develop themselves in government. This opportunity hasn’t gone unnoticed, and after Sadiq Khan’s victory in London has shown that the role can grow beyond the limitations – perceived or otherwise - of the Corbyn shadow cabinet while strengthening team Labour’s credibility by actually being in power.

Shadow Health Secretary and former leadership candidate Andy Burnham’s announcement last week for Greater Manchester was the first big hitter to make his intention known. The rising star of Luciana Berger, another member of Labour’s health team, is known to be considering a run in the Liverpool City Region. Could we also see them joined by the juggernaut of Liam Byrne in the West Midlands, or next-generation Catherine McKinnell in the North East?

If we can get a pantheon of champions elected across these city regions, to what extent can this have an influence on national elections? These new metro areas represent around 11.5 million people, rising to over 20 million if you include Sadiq’s Greater London. While no doubt that is an impressive audience that our Labour pantheon are able to demonstrate leadership to, there are limitations. 80 of the 94 existing Westminster seats who are covered under the jurisdiction of the new metro-mayors are already Labour seats. While imperative to solidify our current base for any potential further electoral decline, in order to maximise the impact that this team can have on Labour’s resurgence there needs to be visibility beyond residents.

The impact of business is one example where such influence can be extended. Andy Burnham for example has outlined his case to make Greater Manchester the creative capital of the UK. According to the ONS about 150,000 people commute into Greater Manchester, which is two constituency’s worth of people that can be directly influenced by the Mayor of Greater Manchester.

Despite these calculations and similar ones that can be made in other city-regions, the real opportunity with selecting the right Labour candidates is the media impact these champion mayors can make on the national debate. This projects the influence from the relatively-safe Labour regions across the country. This is particularly important to press the blame of any tightening of belts in local fiscal policy on the national Tory government’s cuts. We need individuals who have characteristics of cabinet-level experience, inspiring leadership, high profile campaigning experience and tough talking opposition credentials to support the national party leadership put the Tory’s on the narrative back foot.

That is not to say there are not fine local council leaders and technocrats who’s experience and governance experience at vital to Labour producing local successes. But the media don’t really care who number two is, and these individuals are best serving the national agenda for the party if they support A-listers who can shine a bright spotlight on our successes and Tory mismanagement.

If Jeremy Corbyn and the party are able to topple the Conservatives come next election, then all the better that we have a diverse team playing their part both on the front bench and in the pantheon of metro-mayors. If despite our best efforts Jeremy’s leadership falls short, then we will have experienced leaders in waiting who have been able to afford some distance from the front-bench, untainted and able to take the party’s plan B forward.