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.