Good opinion piece here about why people use Wonga, and why it’s unfair to be snobbish about its closure. Like the author, I was once in a position where I had to use them in an emergency to make ends meet. I’m better off now, but plenty of people aren’t.
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Growing up, we lived in a very deprived area and my mum was a single parent and with 4 children under 16 on minimum pay. I remember her taking loans from loan sharks all the time to make ends meet.
Wonga might not be great, they were awful at getting people further into debt, but at least they are a better way than a loan shark.
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Ultimately, they are a symptom rather than a cause of wider problems in society.
The APR’s were sky-high because the loans were risky and defaults were higher, there are plenty of companies operating in that space to keep profits down.
I think recent government policies to force higher minimum payments on things like credit cards are a step in the right direction but I would go further, maybe allowing people to put a block on new credit in the same way people can put a block on gambling activity.
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I never needed to use Wonga, but they certainly tried to clean up their act in later years. Their website was actually quite well made where you put how much and for how long and it told you exactly what you’d pay, although this assumed you paid them back on-time of course. I won’t try and deny that their existance is to fleece money out of the desperate, but out of many “pay day loan” companies, they started to sound like the least shady.
The default thing to do was to complain about the APR, which seems weird to me because it’s converting a fixed amount into a percentage, but because they’re a lender they have to show it as a rate for comparison with other lenders. Like you’d ask for £X for Y days and they’d say it’s £Z on top of £X if paid on time.
If I’ve calculated it right, the “APR” for being £50 overdrawn on Monzo for 20 days (£10 fee) is 365%, so that’s not great either to be honest and encourages people to get more into debt because it costs the same for any amount up to your limit, which is something like £1k for many. I know I’ve bought stuff because “I’m already in overdraft so it won’t cost me any more”. However, the fees are clear and being “late” doesn’t kill you.
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People use these high rate pay day lenders because lower cost options are not available to them. Mainstream lenders need to come up with a system to allow sub prime people to access their products. Until then it’ll continue to be exploitation of the poor
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I’m actually wondering, high fees look good on paper (for the lenders) but do they actually manage to collect them? If people can’t afford them (and thus conventional lenders don’t lend to them), how would being charging more solve this? People can’t pay, whether you’re asking for 10£ or 100£.
As @Rat_au_van points out, these services are for those who cannot get credit with a high street lender. It doesn’t mean they are not financially able to repay a loan. Banks have a higher credit cut off level and Wonga and other similar providers serves those below that level down to insolvency. If you didn’t pay, it would be the same CCJ and bailiffs around that banks would send around. they just wouldn’t be as aggressive as a loan shark might be so people flocked to them.
Wonga 1.0 used to just roll you debt into another fixed term debt “to help”, obviously plus an additional fee, if you couldn’t repay. It prayed on the vulnerable but it reformed into Wonga 2.0 in 2014 and wrote off £220 million of debts but its this past that is the cause of its present woes.
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But if “loan sharks” can actually collect those debts, why can’t a high-street lender accept these lower-credit people and do the same?
Proper loan sharks aren’t exactly legal or subtle in their methods of collecting debt. Intimidation and harassment are their first tactics and it goes downhill from there
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Actual loan sharks are usually well known people locally too so you wouldn’t contact the police as the increasingly violent harassment crept up for not paying. In the end, you paid.
When Wonga first operated was when the laws were very relaxed on payday lending so they could get away with being dodgy. What Wonga didn’t bring was the violence of loan sharks so they were the lesser of two evils.
I found an article on the BBC from 2012 which explains how Wonga chose customers and a bit part of it was how you used their website (although the information is from Wonga so take it with a pinch of salt). I guess high street banks just bracket this group as too risky, were not technologically advanced enough, or as the article suggested were prejudiced, so blanket rejected.
Selectivity
Wonga’s technology filters out applicants who are thought to be too risky, and about 66% of them are currently turned down for not being credit-worthy. For instance you have to have a regular income, a bank account, a functioning debit card, a mobile phone and a good credit record.
The result of this filtering is that so far only about 7% of Wonga borrowers have failed to repay. This is a lower level of default than the 10% bad debt rate on credit card lending, which has led banks to write off billions of pounds in the past few years.
The credit scoring process, however, is more sophisticated than just asking a few simple questions. The firm’s technology allows it to measure how the customers use the website itself, as this offers some valuable insights. For instance, potential borrowers use the online sliders on the computer screen to determine how much they want to borrow and for how long.
The firm has found that people who immediately shove the slider up to the maximum amount on offer, currently £400 for 30 days for a first-time applicant for a personal loan, are more likely than others to default. “The great thing about that is that our decisions are always objective, we are not subject to the same kind of imperfections that traditional lenders have, where different bank managers have different preferences and often prejudices which affect how people get access to credit,” Damelin argued.
Edit: An article from today gives a little more information into the demographics of a Wonga customer.
Who borrows money in this way, and how much?
The average age borrower of a high-cost short-term loans is 35, according to research by the FCA.
High-cost short-term loans include the classic 30-day loans, but also the longer, and newer, three-month loans. In 2016, payday customers typically had nearly three of these loans, although one in 10 had taken out 12 or more.
There are more men (62%) than women who have these debts.
Their average income is £20,400, compared with a national average of £26,370.
The majority (76%) had no savings to fall back on. Of the remainder, the typical amount set aside was £177.
This is particularly a problem as 68% of these consumers were struggling to pay their bills, and they had average debts, excluding mortgages, of £4,700.
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News just breaking that Wonga are now calling in the administrators.
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Interestingly, I wonder if unintended legislation has forced Wonga into administration.
If you are not aware, financial companies like Monzo get the first 25 complaints per year to the Financial Ombusdman for free then they have to pay £500-odd per complaint whether is upheld or not. This stray line in The Guardian’s report states:
But since then Wonga has been hit by a wave of compensation claims, each of which cost the company £550 to process, whether the claim is upheld or not. Many have come from claims management companies, such as PaydayRefunds, which said it had entered about 8,000 claims against the lender.
I updated the thread title.
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Those claims management companies should be the next to be regulated heavily. 30% + VAT for sending a letter is ridiculous
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I don’t get the headline, why should we fear them collapsing for?
Thousands of people with claims against Wonga will probably not get any payout at all now?
I saw an advert for Wonga just today!
And to compound that, they’ll still be liable for their debt, as Wonga’s books are their biggest assets, so will likely be sold off to whoever fancies their chances at chasing those debts.
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“In its last accounts, published in September 2017, the company reported a loss of £66.5m, but said costs and impairments were falling and that it remained a going concern. It said it had 220,000 customers and £430m in loans outstanding, figures which are likely to have decreased since then.”
So approx. £1954 per customer
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