What’s Wrong with Wonga?

Wonga is a micro-finance company operating in the UK. They have the worst adverts that have ever been produced, and provide a service which no sane person would ever want. And yet they’re doing so well here that they’re branching out into South Africa. It’s usually nice to see a company here investing in SA, but in this case, it’s not. And here’s why.

They’re a loan shark in a vegetarian restaurant. Dressed up all nice and respectable, but hoping that you won’t notice their motive. Their website starts out all friendly – all sunny skies, and birds flying and green grass. “Welcome to Wonga. We can deposit up to £400 in your account by xx time today.” And then there’s a couple of easy sliders so you can pick how much you want to borrow (max £400 for new customers), and for how long (max 40 days).

So far, so good – but have a look at the repayment – for £200 borrowed for 30 days, you’re repaying £266. That’s 33% for one month! (I’m not going to annualise the rate like every actuary wants to, because the resultant rate of over 3,000% is too astronomical to make any sense at all). Of course, they have a long explanation of why it’s not really that bad (“Only 1% per day!”).

The fact is, these loans are for people living hand-to-mouth, who need cash to get them through to their next salary, and are not in a position to negotiate. If it’s purely a once-off thing, and it doesn’t reoccur, then it’s just an expensive mistake, and no harm done. If it happens, say, three times a year, you’d be much better off getting a larger, longer-term loan from somewhere like Zopa, be diligent about your finances, and sort yourself out. For example, if you’re getting £200 from Wonga three times a year, you’re getting in £1,200 over two years, and paying back £1,596, and never having enough on hand to make a difference to your life. If you get a £1,200 two-year loan from Zopa, you’ll pay back £1,398 in monthly £58 installments (a saving of £200 over Wonga!) and you have a large sum upfront with which to pay off credit cards, or sort out any issues that are causing you to go over each month.

But I digress – the point of this was to be somewhat disgruntled that this company is going off to SA, to make hay where this sort of problem is already rife. There’s a large up-and-coming lower-middle class trying to get off the ground, and ending up living slightly beyond their means. And so loan sharks and microfinance shops abound in most urban centres. And about the only difference between those guys and Wonga is that the latter is less likely to come at you with a baseball bat in the dark end of an alley at night. Due to restrictions on interest rates in SA, the maximum rate they can charge is much lower than their 33% per month here, and so they make up the difference with exorbitant lending fees. Which ironically means that the shorter the loan term, the more it costs you in percentage terms.

It just grates a bit (especially having a social worker for a wife) that these sort of companies can take advantage of the financially illiterate without making any effort at all to provide more suitable alternatives to their products. I know it’s “just business”, but sometimes there should be more to it than that.

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7 Responses to What’s Wrong with Wonga?

  1. Richard says:

    Many of the people that “need” Wonga, and the so-called necessary evil it brings, would do well to review their local credit union options first. Trouble is, because credit unions don’t make astronomical profits, and usually none, they can’t afford to compete in the same marketing world as those that make horrendous profits. I doubt Albion London would be so keen to make the effort to create a marketing campaign as they have been for Wonga.

    Just part of the natural abhorrence of a free market, maybe. The same thing happens in price comparison tables, and especially if “featured” products appear anywhere near the top. There are plenty of true-comparison services, but you won’t have heard of them – because they’re not making the sort of money they’d need to to compete with marketing dollars.

    So far the UK Government has shown little sign of helping to level up the playing field either. despite the profound good it would do the economy.

    • Nick says:

      Thanks for the comment. I am continually astonished by the amount of money Wonga must be spending on advertising – their presence on Channel 5 (or is it 4?) seems to be never-ending. As for the free market – the idea is that if someone sees Wonga making that kind of money, they’d join in at a competitive level (that is, not quite so exorbitant), and should be able to take away market share, leading to a more level playing field. Local credit unions should be in an ideal space to do this – at least at a local level. Advertising in a local rag, or in community forums should be a lot cheaper, personal and effective. And yet it doesn’t happen…

  2. Mike10613 says:

    I wouldn’t describe Wonga as micro-finance, loan sharks is more accurate. I lend money with Zopa and it is making a difference to savers and borrowers, maybe in the future they will be able to make short term loans without ripping people off.

    • Nick says:

      Just looked up the definition of micro-finance, and see that it has a different connotation in Southern Africa – while here (and elsewhere) it mainly refers to business / entrepreneur finance, it has more of an individual/retail feel back home. Fair point about shorter-term loans on Zopa, though – I see that their fees are a lot higher (£120 vs £5) for 2 year loans compared to 5 year, so there’s some sort of a limit there if that rate of increase keeps up at the shorter end.

  3. onwabia says:

    I think it starts at home. If we were more serious about financial education in schools and for parents, no one would be financially illiterate in the first place. Talked about these payday loans companies a few weeks back. You really hit the nail on the head. People don’t read the small print and get trapped. Here is another micro-finance/extortionist group of companies. PPI claim handlers. UK banks wrongfully charged people payment projectionist insurance on loans and credit cards and the FSA slapped them on the wrist and told them to give us back our money. Taking money that isn’t theirs in the first place. People don’t read the small print there either, or the contracts. They have ridiculous advertising campaigns that flood our TV too! Sharks indeed.

    • Nick says:

      Excellent point about financial literacy. The number of people that I’ve met that sort of glaze over as soon as you bring numbers into the conversation is depressing. I think a focus on practical application of maths should be an essential part of education.

      • onwabia says:

        Definitely. Worked with loads of children, when you apply the maths they are learning to a real situation, suddenly maths isn’t so boring any more. Will always campaign for maths to be more applied.

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