Is Payday Loan Provider Bankruptcy a Good Thing?
Harry, 26, borrowed £ 400 from Wonga for his best friend’s bachelor party in Amsterdam in January. As a trainee accountant in one of the Big Four he earns over £ 30,000, but he had spent a lot by Christmas. He successfully applied on his phone and received a text a few minutes later: “Great news! We can confirm that £ 400 just left Wonga and is heading to your bank account at lightning speed (well, super fast anyway). Just under two weeks later he paid off the loan, along with £ 38.40 in interest.
“I don’t know what it is,” he said. “I knew from the start how much I would have to pay back. I paid to borrow money. It would be the same if I rented a car or a costume.
Harry is the kind of client Wonga hoped to attract when it was founded in 2006. As the first company in the world to fully computerize consumer loans, it was a disruptor, offering a user-friendly alternative to slow, rigid, and long-term sources. credit.
She never saw herself as a payday lender, preferring to describe herself as a maverick tech company that inadvertently sold loans. Sophisticated business intelligence technology would ensure that only creditworthy people could access loans that were customizable in size, duration and cost.
Wonga exploded in the wake of the 2008 financial crash. At one point he sponsored Newcastle United and reportedly explored an IPO in the United States that would have valued him over $ 1 billion (£ 770 million sterling).
This week, curtailed by compensation claims and a government crackdown on payday lenders, the company stopped issuing new loans and announced its entry administration.
It was not just young creditworthy professionals who took out the loans. Virtually anyone could borrow money, regardless of whether they would be able to repay it. When low-income people with bad credit needed cash fast, payday lenders were an easy solution – until the repayment was due.
After her divorce in 2013, Nina, now 37, moved into social housing with her two sons. Her last apartment had a fully equipped kitchen, but her new home had no appliances. She borrowed £ 500 for a fridge freezer and washing machine.
She does not remember which payday lender the first loan came from, or the interest rate, but remembers being asked to pay back over £ 700 a month later. She took out another loan to help pay it off. The following month she owed almost £ 1,000, and almost £ 2,000 a month later.
“It was so easy. I saw an ad on TV, went to Google and clicked on the first one that appeared. ‘
“It was so easy. I saw an ad on TV, went to Google and clicked on the first one that appeared. The application was quick. I have been to a different company each time. I have always been approved.
Nina ended up receiving 20 to 30 calls and emails a day. Eventually, she told the companies she couldn’t pay. She was put on a debt repayment plan, with interest frozen. She estimates that the £ 500 she took out ended up costing more than £ 2,000. “Maybe I shouldn’t have taken that first loan, but they should have realized how difficult it would be for me to pay it back. I had no idea the extent of the interest.
Some results were worse. In 2013, Kane Sparham-Price, a disabled teenager, committed suicide the day Wonga emptied his bank account.
Public sentiment has turned against payday loans and their annual nosebleed rates, which were often over 5,000 percent. Wonga, in particular, with his brash name and cheerful puppet announcements, was attacked. Justin Welby, the Archbishop of Canterbury, said he would “compete [it] with the launch of a Church-backed credit union.
In 2014, the Financial Conduct Authority (FCA) capped rates at the cost of the loan and prohibited loan renewals. Sales to Wonga fell to just £ 77million (resulting in an overall loss of £ 65million) in 2016, from over £ 300million at the peak of 2012. Absence claims Checks on whether customers could afford loans taken out before 2014 began to pour in.
This year, as the deadline for mis-sold PPI claims approached, lawyers turned their attention to payday loan complaints. The Financial Ombudsman Service received 10,979 new payday loan complaints between April and June, compared to just 3,126 during the same period last year. Even the unsuccessful ones cost Wonga £ 550.
“If we started from scratch, we could build a sustainable business. But we have the problem with our legacy and how we manage our cost base, ”CFO Paul Miles said in 2014.
This legacy has caught up with Wonga – and other payday lenders. Remember Check Center or Cash Store?
What is happening now?
Lucie Russell, director of the Fair by Design campaign, points out that people living in poverty, who are mostly working households, often pay more for their essential services, including credit. “The Wonga collapse is no cause for celebration as we have yet to address the underlying issues that cause people to seek expensive short-term loans,” she said. “Companies like Wonga have helped many of their customers’ financial problems rather than solving them. “
“I fear that many people fall out of desperation into the hands of money lenders who operate outside the law.”
Nick Butler, a visiting professor at King’s College London who worked as a senior policy adviser to Gordon Brown, says Wonga’s collapse could push people towards loan sharks. “I don’t like Wonga, but I’m afraid a lot of people will fall out of desperation into the hands of money lenders who operate outside the law. I remember that my mother, after my father died, regularly had to pledge things and borrow from anyone who wanted to lend money. I remember having to shut up to avoid knocking on the door.
According to the Joseph Rowntree Foundation, one in eight workers in the UK lives in poverty – 3.8 million people. UK households spent around £ 900 more on average than they received in income in 2017, pushing their finances into deficit for the first time since the credit boom of the 1980s.
Peter Tutton, policy manager at debt charity StepChange, welcomes the tighter regulation of high-cost credit, but warns that a safer market is only half the answer. “We estimate that 1.4 million people are forced to use high-cost credit to cover essential household bills, putting more pressure on already stretched budgets,” he said.
What are the alternatives ?
One option is credit unions, nonprofit money unions that offer loans to members, often at no more than 1 percent per month (12.7 percent APR). Martin Groombridge, managing director of London Capital Credit Union, says regulations against the expansion of credit unions are limiting their growth. “You can only join if you live or work in a certain area. In London, we couldn’t advertise in the Evening Standard because most people couldn’t register, unlike Barclays or Wonga.
Over a million people are now members of credit unions, but they are not for everyone. Gemma Evans, 32, of Holyhead, is on benefits and was unable to enroll due to her credit rating and her husband’s bankruptcy.
Now she uses Fair For You, a charity-owned community service business that sells household items on credit. Sheb would need a tumble dryer, bed and deep fryer after his eviction. Previously, she had used a range of payday lenders. “When you get the money you sometimes think, ‘Oh, we’ll just have a Chinese’. You’re not using it to its potential, ”she says. “I asked for more expensive things and they said, ‘We don’t think you can afford it. “
Fair For You CEO Angela Clements says she’s learned a lot from payday lenders. “Each of our customers wants to use their smartphone and talk to us online. Wonga was smart. Customers want to use credit easily. We got a lot of the Wonga way of thinking: as simple as it gets – but without cash loans. Money doesn’t always end where you think it’s going.