The payday lender giant is on the verge of shutdown. It has stopped accepting new loan applications, and is fighting off a swamping amount of compensation claims from its customers.
Source: https://bit.ly/2YOwv6S
At one point, Wonga was Britain’s biggest payday lender, but it has now been loss making for several years. The troubled lender has come under pressure after thousands of customers claimed compensation for being sold a loan they could not afford and being charged excessive interest rates. It blamed claims management companies for the rise, but said it was making progress against a transformation plan set out for the business. Six years ago, the founder of Wonga envisaged the lender as a “platform for the future of financial services”. Certainly, the company enjoyed many successes but now it looks like the future of UK’s largest payday lender company has taken a turn for the worse.
A payday lender is a company that lends customers small amounts of money at high interest rates. The loan needs to be repaid speedily, usually when the borrower receives their next month’s wages. This can appear as an efficient loaning practice, but it has its dangers. The worst danger to the customers is the massive interest rate of 4,000% or more in case of late repayments. This means that even if the borrower takes out a relatively small amount, they will end up owning a large amount of money that could cause them serious financial difficulties. Also, the interest rates for the average loan are far from unnoticeable. The average payday loan is £250, which would have earned Wonga £150 in interest.
The company was regularly criticized for its practices. Prominent figures, such as the Archbishop of Canterbury, said that they aim to put firms like Wonga “out of business”. The firm, just like any other payday lender, usually attracts people who are not fully aware of the costs of the loan, or people who are in desperate need for quick money. These groups are usually more vulnerable, and are most likely to suffer consequences, which can lead to serious financial difficulties. This is why, in 2014, the Financial Conduct Authority (FCA) put a cap on the cost of payday loans at a 0.8% interest per day. This caused Wonga to report an annual loss of more than £34 million for 2014.
A big part of Wonga’s difficulties is the overwhelming amount of compensation claims that it is facing. The borrowers are initiating only 10% of those compensation claims. The rest are being filed through claims management companies (CMCs). The CMCs technique is to file hundreds of claims at once, because they know that the lenders only have 8 weeks to respond to the claims. This puts Wonga under pressure, and makes it more likely for the lenders to pay out, as they don’t have the time to assess each case.
When banks allow their customer to take out a loan, they need to be sure that the lender will be able to repay their loan. The banks usually make sure of this by requiring collateral to be put up. This is crucial; otherwise the banks will be put out of business. However, short-term loans don’t require collateral to be put up. This means that they have no way to offset the cost of the loan incase the borrower defaults. Therefore, they need to set the loans higher to protect themselves and their business. This means that customers will end up paying a lot more for easy-to-get, short term loans.