# 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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# Want an independent-minded MP? Vote for a career politician

The brutally ambitious are not content to fall in with the crowd.

“Never having had a ‘real’ job outside of politics”: this is what the majority of respondents told a YouGov poll in 2014 when asked the most undesirable characteristic of the British politician. The result is hardly surprising. Type the words “career politician” into your search engine or raise the topic at a dinner party, and quickly you will be presented with a familiar list of grievances.

One of the fundamental criticisms is that career politicians in parliament are elitists concerned only with furthering their own interests. Their pronounced and self-serving ambition for climbing the ministerial ladder is said to turn them into submissive party-machines, sycophants or yes men and women, leading them to vote loyally with their party in every parliamentary division. But do we actually have evidence for this?

A new in-depth analysis, to be published later this month in the academic journal, Legislative Studies Quarterly, presents a forceful challenge to this conventional wisdom. In fact, I find that career politician MPs in the UK are more likely to rebel against their party than their non-career politician peers. Why?

My study was motivated by the observation that the existing impression of the party loyalty of career politicians is based mostly on anecdotal evidence and speculation. Moreover, a look through the relevant journalistic work, as well as the sparse extant academic literature, reveals that the two main hypotheses on the topic make starkly contradictory claims. By far the most popular — but largely unverified — view is that their exclusively professional reliance on politics renders career politicians more brutally ambitious for frontbench office, which in turn makes them especially subservient to the party leadership.

The opposing, but lesser known expectation is that while career politicians may be particularly eager to reach the frontbenches, “many of them are also much too proud and wilful to be content to serve as mere lobby fodder”, as the late Anthony King, one of the shrewdest analysts of British politics, observed nearly thirty years ago on the basis of more qualitative evidence.

Faced with these opposing but equally plausible prognoses, I assembled biographical data for all the MPs of the three big parties between 2005-15 (more than 850) and analysed all parliamentary votes during this period. I followed the debate’s prevalent view that an exclusive focus on politics (e.g. as a special adviser or an MP’s assistant) or a closely-related field (e.g. full-time trade union official or interest group worker) marks an MP as a careerist. In line with previous estimations, just under 20 per cent of MPs were identified as career politicians. The extensive statistical analysis accounted for additional factors that may influence party loyalty, and largely ruled out systematic differences in ideology between career and non-career politicians, as well as party or term-specific differences as drivers of the effects.

As noted above, I find strong evidence that career politician backbenchers are more likely to rebel. The strength of this effect is considerable. For example, amongst government backbenchers who have never held a ministerial post, a non-career politician is estimated to rebel in only about 20 votes per parliament. By contrast, a career politician dissents more than twice as often — a substantial difference considering the high party unity in Westminster.

This finding reveals a striking paradox between the predominantly negative opinion of career politicians on the one hand, and the electorate's growing demand for more independent-minded MPs on the other. In fact career politicians are the ones who perform best in delivering on this demand. Similarly, the results imply that the oft-cited career-related dependency of career politicians on the party can be overridden (or, at the very least, complemented) by their self-image as active and independent-minded participants in the legislative process. This should attenuate the prevalent concern that a rise in career politicians leads to a weakening of parliament’s role as a scrutinizing body.

Finally, the findings challenge the pervasive argument that a lack of experience in the real world disqualifies an MP from contributing meaningfully to the legislative process. Instead, it appears that a pre-parliamentary focus on politics can, under certain circumstances, boost an MP's normatively desirable willingness to challenge the party and the executive.

Raphael Heuwieser is researching political party loyalty at the University of Oxford.