Payday lending here to stay despite Wonga's fall
Wonga wasn’t the cause of payday lending and its collapse won’t mean the end of people running out of money, writes Simon Penfold.
Wonga has come in for a lot of stick over the years, and few will mourn its demise, but it would be foolish to expect that its fall into administration will somehow mean the end of payday lending.
People will still get into debt and will continue to find themselves short of cash when hit by an unexpected bill. And, increasingly, people are finding themselves short of cash when the expected bills turn up as well.
Figures out this week from the National Debtline charity reveal that callers are increasingly struggling with arrears on everyday household bills.
Just because Wonga has gone, the need it filled still exists. People have attacked the company for the eye-watering interest rate it charged but, to be fair, it never hid those figures. It always made it clear how much a customer would have to repay, and what the penalties would be if the repayment was missed.
The Financial Conduct Authority has slapped some restrictions on the way payday lenders operate, but the likes of QuickQuid and Wizzcash are still out there ploughing the same furrow as Wonga.
While the restrictions on its business didn’t help Wonga, what appears to have brought it to its knees were the hordes of mis-selling compensation claims. It has been suggested these were costing Wonga £500 a time just to handle the paperwork.
It is not a pretty thought, but Wonga served a need. It was being used by people who had debts and bills to pay but couldn’t find anyone else to lend them the money – banks for instance.
If someone is banging on the door demanding their money, then people in desperation will find the cash whichever way they can and will try to deal with the interest repayments later. The result, of course, can see them racking up even more debt in the medium or long term.
And there is always the danger that, refused money by banks and other lenders, those people turn to more unscrupulous sources. Doorstep lenders and loan sharks continue to plague the poorer members of society. Credit unions, set up by local people to provide loans to each other and help people save, are one solution.
And they recognise the dangers. Alfred Williams, chairman of the board of directors at Wolverhampton City Credit Union, said: “Now that Wonga has fallen into administration, there is a risk that other extortionate lenders will step into the breach. Doorstep lenders like Provident and high interest rent-to-own stores like BrightHouse are still very active in the city. We’d urge the people of Wolverhampton to join their local credit union for apply for a loan.”
Zero hour contracts
He argues that credit unions are a better alternative than Wonga: “For example, if you borrowed £300 with the credit union over 34 weeks, you’d pay a total of £30 in interest. Wonga’s £300 Flexi Loan over three months would cost you £131.51 in interest.
“We offer even lower rates of interest to people who save or borrow with the credit union directly through their salary at work.”
But credit unions don’t work for everyone. It is easy to blame people for mismanaging their money, but in these days of zero hour contracts people often find their wages just don’t go far enough. Under pressure to provide their families with the things they believe they need – be it furniture, fridges or just food and clothing – people will go where they have to in order to find the money.
That is why when Wonga collapsed its still had around 220,000 existing borrowers and a loan book worth about £400 million. And those people will still have to pay off their debts. There will be no ‘get out of jail free’ card for them.
And there are plenty more people out there getting into money trouble. National Debtline, run by the Money Advice Trust, says demand for help with debts is expected to reach a five-year high across 2018. It predicts it will have received 189,000 calls by the end of this year. Half of callers to National Debtline are now struggling to repay debt of £5,000 or less – up from less than a quarter (22 per cent) in 2008. More and more callers are in arrears on their rent, their council tax and their energy bills. Money Advice Trust chief executive Joanna Elson said: “We need to change how we think about problem debt in the UK.
“Ten years ago a typical caller to National Debtline was struggling to pay credit cards and personal loans.
“Today, callers are struggling with smaller but trickier debts, usually on everyday household bills – and often caused by broken budgets, where the money coming in is simply not enough to cover their essential spending.”