In 2014 the payday lender Cheque Centre went in Administration; in 2015 it was Cash Genie and last week, the “straight talking money” payday lender Wonga went into Administration. So, I have decided to look deeper into payday loans, what’s gone wrong with Wonga and implications on its customers.
We know that payday loans are ‘bad’ but why are they so popular?
I have a full-time safe salaried job with a small house, a cheap car, no fashion sense and some savings. Therefore, I have never considered a payday loan as a viable form of financing and if I saw an advert on TV I would go to the kitchen and make a mug of drinking chocolate. However, in the UK there are c.2 million people paid the minimum wage, 5.5 million self-employed people with inconsistent income and millions of workers who live on part time wages. In addition, many jobs that were once salaried and full-time are ‘renewed’ to being self-employed and part-time under the pretext of flexibility and cost-effective management. As well as demoralising workers and in turn reducing productivity, the unpredictable income and household expenses mean that many workers who have become part of this “dynamic” economic structure (that is in reality not dynamic at all) of micro-jobs and sometimes need short-term borrowing.
So, in stepped Wonga with its friendly TV advertising and its clever smartphone app allowing applicants to quickly obtain small amounts of cash. Within 15 minutes your short-term financial problem could be resolved. Yes, the 5,000%, interest rate was exorbitant, which could result in a £20 bill after just a few days, but that was insignificant compared to, say, £30-a-day unauthorised overdraft charges levied by some high-street lenders. Therefore, payday loans in its very basic principle are not evil if for short-term NEED that can be quickly repaid but lines get crossed when lenders go from helping the needy to taking advantage of them. Furthermore, basic principles do not make much profit in this scenario and payday loan companies like Wonga didn’t just cross the line but tore it up and threw it in the face of their borrowers. Therefore, payday loans and ethical lending are uneasy bedfellows and one of them had to leave.
What went wrong with Wonga?
To summarise, I will quote my financial hero, Martin Lewis, who says it best: “Wonga’s payday loans were the crack cocaine of debt – unneeded, unwanted, unhelpful, destructive and addictive. Its behaviour was immoral….” This behaviour included sending letters to customers using fake solicitors’ names like “Chainey, D’Amato & Shannon” and “Barker and Lowe” and adding legal costs to the debt. For this, Wonga was ordered to pay £2.6 million in compensation to 45,000 customers. Somehow it avoided criminal investigation. More subtle bad behaviour included its TV advertising with latex puppets failed to tell consumers of its 5,853% annual interest rate to borrow for things they apparently needed. More nails in the coffin: In 2014, Wonga was forced to write off £220m of loans to 375,000 borrowers that later admitted should never have been given loans. Also in 2015 the Financial Conduct Authority (FCA) introduced a 0.8% price cap on high cost short-term credit (HCSTC), limits on how many times a payday loan could roll over and stronger guidance on affordability checks to help regulate the market, making it fairer for borrowers. James Daley, managing director of campaign group Fairer Finance, comments on the downfall: “It’s not surprising that Wonga are in this position because they exploited a market that was loosely regulated. They were in the vanguard of giving people quick access to credit with high prices and high fees and they didn’t treat their customers well.”
Should we celebrate?
Yes, Wonga’s downfall is a consumer victory sending a strong message to other lenders who make a profit from people in financial hardship to watch out and play nice. So there could be no better time to put on your party trousers and dance to “Stand and Deliver” but wait…. with Wonga gone, what’s going to fill the void? Martin Lewis comments that in Wonga’s place there will be a “multi-headed hydra of other parasitical high cost lenders” waiting to take its place. Actor Michael Sheen (who launched a scheme to end high interest lending) warned that “the real danger is that those customers are going to turn to possibly even worse places” and that “ministers must intervene to protect customers who still owe money to Wonga by ensuring they are transferred to an ethical provider, with their repayment terms either the same or improved”.
Should Wonga customers still repay their loans?
There are an estimated 200,000 customers still owing more than £400m in short-term loans who may think that Wonga has died and they do not need to repay. False. Wonga has not vanished; it’s in Administration which means that control of the company has passed to insolvency practitioners at Grant Thornton. Oh, and Grant Thornton will want to be paid. In short, the debt is still owed, on the same terms, and borrowers still need to pay it back – at the same rate. Failure to do so could result in letters from solicitors (real ones this time). In fact, now is the time for borrowers to be double-careful with their money. If there’s one thing that’s clear, it’s that payday lenders can take advantage of people who are struggling with their money – and that means borrowers may be asked by other lenders if they would like to roll Wonga loans into new high-priced payday loans. A ‘no thank you’ should suffice.
Will those entitled to compensation eventually receive it?
No, or at least not all. There are an unknown quantity of claims relating to mis-selling particularly from pre-2014 (prior to FCA regulations) often represented by payment management companies. These claimants would now be unsecured creditors of the Administration, where secured creditors get paid first, and should contact Grant Thornton to lodge their claims. To qualify for a dividend, customers would need to prove that their financial situation worsened as a result of the loans which were irresponsibly lent to them. They need to include details such as the address they lived in at the time they applied for the loan, and how easy it was to get the cash.
If you or your business need any advice on any of the above or cash flow problems, please call the PKF Francis Clark Business Recovery team who can help on 01392 667000 to arrange a free, no obligation, initial meeting.