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You can find the current article at its original source at http://www.theguardian.com/commentisfree/2014/oct/03/wonga-just-a-symptom-of-austerity-britain
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| Wonga is just a symptom of austerity Britain | Wonga is just a symptom of austerity Britain |
| (35 minutes later) | |
| On Thursday, the chairman of Wonga, Andy Haste, announced that the company would write off £220m of loans to borrowers. In a move that will surely become an unbeatable world record for the largest number of simultaneous haircuts administered by one man, Haste said Wonga would write off loans to 330,000 people and forgive all interest and charges for a further 45,000. | On Thursday, the chairman of Wonga, Andy Haste, announced that the company would write off £220m of loans to borrowers. In a move that will surely become an unbeatable world record for the largest number of simultaneous haircuts administered by one man, Haste said Wonga would write off loans to 330,000 people and forgive all interest and charges for a further 45,000. |
| The joke is that for a company that charges annualised interest rates of up to 5,853%, the £220m represents just one £1,000 loan borrowed by a man called Bob in Colchester, four years ago. This is nonsense, of course. After four years of non-payment at that rate, Bob would owe Wonga a mere £234,120. Unless of course he could add the arrears annually to the principal and re-borrow at the same competitive rate, in which case he would owe roughly £12.5bn. | The joke is that for a company that charges annualised interest rates of up to 5,853%, the £220m represents just one £1,000 loan borrowed by a man called Bob in Colchester, four years ago. This is nonsense, of course. After four years of non-payment at that rate, Bob would owe Wonga a mere £234,120. Unless of course he could add the arrears annually to the principal and re-borrow at the same competitive rate, in which case he would owe roughly £12.5bn. |
| Levity aside, it is a stark illustration of the spiral of debt. The too-liberal availability of payday loans has created an easy way for people in desperate need to defer their shortfall temporarily but cause it to snowball in the long run. | |
| A parliamentary business select committee heard evidence on this last year, prompted by a dossier from the (now defunct) Office of Fair Trading. Peter Tutton, head of policy at the debt charity StepChange, told the committee that many borrowers were “in a hole and a payday loan helps them to dig the hole deeper”. Compelling new evidence from the US has found that four out of five payday loans are renewals, or “rollovers”. | A parliamentary business select committee heard evidence on this last year, prompted by a dossier from the (now defunct) Office of Fair Trading. Peter Tutton, head of policy at the debt charity StepChange, told the committee that many borrowers were “in a hole and a payday loan helps them to dig the hole deeper”. Compelling new evidence from the US has found that four out of five payday loans are renewals, or “rollovers”. |
| Henry Raine, head of regulatory and public affairs at Wonga, disagreed, telling the committee: “We aim to lend to people who can pay us back. We do everything we can to lessen the load of bad debt.” Thursday’s announcement may cause him to reassess that statement. The 375,000 people whose debt Wonga has had to partially or wholly write off represent one in five of its yearly borrower total. This is no blip or accident; it is mismanagement on a colossal scale. All the more stunning then that, according to the Financial Times, the company could still break even in 2014. | Henry Raine, head of regulatory and public affairs at Wonga, disagreed, telling the committee: “We aim to lend to people who can pay us back. We do everything we can to lessen the load of bad debt.” Thursday’s announcement may cause him to reassess that statement. The 375,000 people whose debt Wonga has had to partially or wholly write off represent one in five of its yearly borrower total. This is no blip or accident; it is mismanagement on a colossal scale. All the more stunning then that, according to the Financial Times, the company could still break even in 2014. |
| The counter-argument is that payday lenders perform a useful function, making finance available to people who would otherwise be excluded from financial products and protecting them from loan sharks. | The counter-argument is that payday lenders perform a useful function, making finance available to people who would otherwise be excluded from financial products and protecting them from loan sharks. |
| There are, however, two big assumptions underlying this. The first is that people already in the grip of poverty and debt having access to financial products with astronomical interest rates is a good thing. The second is that a lender such as Wonga – which charges 5,853% in annualised interest, which has admitted that it failed to properly assess customers’ ability to repay, whose advertising was found to be misleading and banned by the Advertising Standards Authority, which was fined for sending threatening letters from nonexistent law firms to customers (sometimes adding legal fees) – is somehow not a loan shark. That size, scale and a professional letterhead are an acceptable proxy for ethics. | There are, however, two big assumptions underlying this. The first is that people already in the grip of poverty and debt having access to financial products with astronomical interest rates is a good thing. The second is that a lender such as Wonga – which charges 5,853% in annualised interest, which has admitted that it failed to properly assess customers’ ability to repay, whose advertising was found to be misleading and banned by the Advertising Standards Authority, which was fined for sending threatening letters from nonexistent law firms to customers (sometimes adding legal fees) – is somehow not a loan shark. That size, scale and a professional letterhead are an acceptable proxy for ethics. |
| In other ways, Wonga is just a soft target, put in the stocks for angry plebeians to throw rotten fruit at. It would be a mistake to let it distract from other, more structural and deeply entrenched issues. Just like foodbank use, it is austerity policies that create demand for payday loans, not their availability. Banks have tightened their lending criteria to a degree that has choked growth, and are using funds made available through quantitative easing and low interest funding schemes to boost their balance sheets instead. | In other ways, Wonga is just a soft target, put in the stocks for angry plebeians to throw rotten fruit at. It would be a mistake to let it distract from other, more structural and deeply entrenched issues. Just like foodbank use, it is austerity policies that create demand for payday loans, not their availability. Banks have tightened their lending criteria to a degree that has choked growth, and are using funds made available through quantitative easing and low interest funding schemes to boost their balance sheets instead. |
| The financial desperation this creates means consumers feel so sure they will be refused and so grateful to be given a loan that they do not look for alternatives. There is a wide range of interest rates even among payday lenders, so borrowers should shop around. And there are alternatives to payday loans – perhaps not for everyone, but for many. Going to your employer for an advance or asking family and friends for help, where that would be a viable option, often nips the problem in the bud. Communicating with creditors and being open about struggling to keep to your commitments can yield extensions or new repayment plans. There are budgeting loans available from the social fund or low-interest loans from local credit unions. | The financial desperation this creates means consumers feel so sure they will be refused and so grateful to be given a loan that they do not look for alternatives. There is a wide range of interest rates even among payday lenders, so borrowers should shop around. And there are alternatives to payday loans – perhaps not for everyone, but for many. Going to your employer for an advance or asking family and friends for help, where that would be a viable option, often nips the problem in the bud. Communicating with creditors and being open about struggling to keep to your commitments can yield extensions or new repayment plans. There are budgeting loans available from the social fund or low-interest loans from local credit unions. |
| Most important of all, we need a resistance to the spending of future income; a resistance to debt by applying a harsh and rational assessment of what we need as distinct from what we want; a culture of delayed gratification and saving up for inessentials. Payday lenders should be the last resort, but they are sadly too often the first. Unfortunately there is significant stigma attached to those struggling financially, along with a feeling of personal failure – and I speak from experience. This makes the ease and privacy of a website that promises quiet help attractive. | Most important of all, we need a resistance to the spending of future income; a resistance to debt by applying a harsh and rational assessment of what we need as distinct from what we want; a culture of delayed gratification and saving up for inessentials. Payday lenders should be the last resort, but they are sadly too often the first. Unfortunately there is significant stigma attached to those struggling financially, along with a feeling of personal failure – and I speak from experience. This makes the ease and privacy of a website that promises quiet help attractive. |