I don't watch vast amounts of television, but my attention was drawn recently to an advert for something called Wonga.com (no, there's no link, for reasons that will become obvious). Cheaply made, the advert explains how you can borrow small(ish) amounts until payday with little hassle and immediate decisions on whether or not you will be approved.
Yes, another opportunity for people to get into debt and, as a concept, probably filling a niche in the market. However, such services come at a cost, and I was intrigued to find out what that cost might be. The answer was a typical APR of 2,689%, the sort of rate that one associates with large gentlemen in ill-fitting suits calling at your door at unexpected moments and offering you the use of your fingers back in due course.
Let's put that into context. If you were to borrow £200 for twenty days, the interest would amount to £40.53, i.e. interest would accrue at more than 20% in the short period of the loan's existence - assuming that you could pay it back at the end of the term. There is also a £5.50 transmission fee to be added on, making the total cost of that loan £46.03. Now compare that with an unapproved overdraft at, say Santander, at 19.9% annually, and you can see why I take the view that I do.
Now I wouldn't necessarily say that such lenders should be banned, as people should take responsibility for their own stupidity (and if you're borrowing at that sort of interest rate, you might not be the sharpest pencil in the box), but there is a good question as to the appropriate level of regulation to be applied. After all, if people get into serious debt as a result if using such services - and 'serious' is entirely relative to your income levels - ultimately, society suffers through consequential losses.
So, I will be interested to hear how the Government responds when this question is raised in the Lords next Thursday. One assumes that, given their desire to introduce better, more effective regulation of the financial sector, this would be one of the areas they might want to prioritise.
6 comments:
I took out a payday loan once; was soon after we first met. I'd taken a job for a certain employer that had a weird payment system. You got paid in the middle of the month, for that calender month.
I started in the middle fo the month, so would have to wait a whole month to get paid, but would then get 6 weeks pay at once, as they'd pay the backpay.
I needed a bus pass, and food, and didn't really know anyone there well enough to impose and borrow.
So I took out a loan like that. Sure, it cost me above the odds, but it was a good option, and was available immediately.
There're obviously those that abuse it, but I do worry about seeing reports of an Annual Percentage Rate for a loan that's specifically for a few weeks only.
I borrow £200, pay back £250 in two weeks. Meh, that's a massive APR, but if I need the £200 now, and will get paid in two weeks a lot more than that.
If we over regulate, those that actually need the immediate help may see it disappear, I imagine that, despite appearances, it's a low margin high risk sector, lots of people will default.
And, I know from experience, banks can at times be very cautious about helping those who've been out of work for a bit and just restarted. Which is why I took the deal.
(It wasn't for £200, it was something like £75, can't exactly remember, but it bought me a bus pass and some food)
Your Google Ads on the right there are now advertising for payday loans #fail?
Mat,
I'm not saying that payday loans are wrong, or that they shouldn't be available - most people are perfectly capable of balancing the costs against the benefits. However, there is a point beyond which the rates of interest charged become a problem that impacts on wider society. All political parties talked about smarter regulation of the financial sector, and I think that any government needs to give serious consideration to the appropriate level of regulation.
At the moment, payday loans are advertised as being easy and relatively cheap - the Wonga.com advert is at best evasive about the likely costs. Local credit unions and microbanking might provide better, cheaping options, and there is a case to be made for government action to make these more accessible.
Anonymous,
Point taken. It seems that Google AdSense responds to your content when selecting which adverts to display on your blog. I may need to consider the filters in the near future...
I'm a student and without Wonga I wouldnt be able to live sometimes. The loans come at stupid times and its just impossible to control finances even with a job that pays monthly.
I really don't mind paying the fees because it comes immediately and when i have had troubles repaying at one point I rang them and they were so friendly and helpful. I really cant fault them. Its all clearly shown how much you will be charged and what you owe and can reduce the charges by paying earlier. I am not sure about other companies but Wonga definitely deserve a good rating. Their customer service is amazing.
horrendous experience, discovered my son had borrowed a small amount initially and he then revealed it had gone from £50 to £220 in a matter of a week, it is WRONG to take advantage of vulnerable students - SO WRONG
obviously the writer has never suffered from real poverty where you dont have a single penny to buy food until next payday but have a child or children to feed.
yes they are loansharks and yes it is wrong,but do not question the existence of wonga but question how we come to have a society in the so called developed world where this kind of poverty still exists and do not worry the present government are capitalist lackeys of the usa and will never ban these companies,in fact they probably have shares in the company as many tories probably had shares in the german companies that produced munitions in ww2 and probably even had shares in the companies that sold zyclone b to the nazi regime. Deal with the poverty and these companies will almost disappear anyway.
Never forget this England is a legacy of a nazi anyway the heartless evil known as thatcher. thatcher
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