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.

Getty Images.
Show Hide image

Douglas Carswell leaves Ukip to become independent MP

The Clacton MP quits his party but insists he will not rejoin the Conservatives or trigger a by-election. 

Douglas Carswell has long been a Ukip MP in name only. Now he isn't even that. Ukip's sole MP, who defected from the Conservatives in 2014, has announced that he is leaving the party.

Carswell's announcement comes as no great surprise. He has long endured a comically antagonistic relationship with Nigel Farage, who last month demanded his expulsion for the sin of failing to aid his knighthood bid. The Clacton MP's ambition to transform Ukip into a libertarian force, rather than a reactionary one, predictably failed. With the party now often polling in single figures, below the Liberal Democrats, the MP has left a sinking ship (taking £217,000 of opposition funding or "short money" with him). As Carswell acknowledges in his statement, Brexit has deprieved Ukip of its raison d'être.

He writes: "Ukip might not have managed to win many seats in Parliament, but in a way we are the most successful political party in Britain ever. We have achieved what we were established to do – and in doing so we have changed the course of our country's history for the better. Make no mistake; we would not be leaving the EU if it was not for Ukip – and for those remarkable people who founded, supported and sustained our party over that period.

"Our party has prevailed thanks to the heroic efforts of Ukip party members and supporters. You ensured we got a referendum. With your street stalls and leafleting, you helped Vote Leave win the referendum. You should all be given medals for what you helped make happen – and face the future with optimism.

"Like many of you, I switched to Ukip because I desperately wanted us to leave the EU. Now we can be certain that that is going to happen, I have decided that I will be leaving Ukip."

Though Ukip could yet recover if Theresa May disappoints anti-immigration voters, that's not a path that the pro-migration Carswell would wish to pursue. He insists that he has no intention of returning to the Conservatives (and will not trigger a new by-election). "I will simply be the Member of Parliament for Clacton, sitting as an independent."

Carswell's erstwhile Conservative colleagues will no doubt delight in reminding him that he was warned.  

George Eaton is political editor of the New Statesman.