Last month the most high profile name in the short term loans industry went into administration. What does the collapse of Wonga mean for the industry and its customers? And if there are no regulated short term loans, what are the alternatives to Wonga?
By Mark Richards.
Wonga was founded in 2006 and – at its height – was estimated to control 30-40% of the UK’s short term loans market. Its was the sponsor of Newcastle United, was the first firm to provide an instant lending application on an iPhone and won the Guardian’s Digital Innovation Entrepreneur Award in 2011.
At the end of last month, Wonga went into administration following a series of disappointing financial results and a surge in compensation claims. Administrators have now been appointed who will wind down the business – although over the weekend there was a story that the Church of England was interested in a potential rescue for Wonga customers.
If you are a Wonga customer and need information about what to do, you can visit here
Whatever ultimately happens to Wonga it is a high profile collapse and one that will focus more attention on the short term loans industry. In this article, we try to address some of the obvious questions that will be asked – in as impartial a way as possible.
What is a short term loan?
Typically they are loans of up to £500, to be repaid over a short term, or until ‘payday’ – hence the expressions ‘payday loans’ and ‘payday lenders.’
Is the demand for short term loans growing in the UK?
Our analysis suggests that the answer is ‘yes,’ with the number of web searches for that – or similar – terms more than doubling over the past year. We have written previously about the well-documented fact that average wages are struggling to keep up with inflation, and this will inevitably lead to people seeking short term loans. A recent report by the Consumer Finance Association suggested that the average income of people looking for short term loans was gradually increasing.
One possible reason for this might be that people are becoming more conscious of the importance of their credit history and/or more aware of the stinging fees banks and other financial institutions will impose for missed payments. If you are faced with missing a credit card payment or going over your overdraft limit, a short term loan can make very good financial sense.
Where have the compensation claims come from?
They are grandly called Claims Management Companies (CMC). You may know them as the people who telephone you at all hours to ask if you have ever had Payment Protection Insurance, ever think you have been mis-sold a mortgage or if you have ever fallen over at work. Having moved through endowment mortgages to pensions mis-selling to PPI, the CMC (who are currently completely unregulated) seem to have alighted on short term loans as their next source of income.
Claims against short-term lenders were recently reported to be up 11,000 in the last quarter for which figures were available, compared to 3,000 in the same quarter last year. Charging up to 36% of any compensation received – and seemingly prepared to send any claim, however spurious to the Financial Ombudsman – these firms pose a real threat to the industry.
With the Financial Ombudsman charging the lenders £550 to look at any complaint – even for a loan of £250 – it is easy to see how an upsurge in bogus complaints could bring the short-term loans industry to its knees. And while Casheuronet UK (owner of Quick Quid) and Wonga featured prominently in the list of most-complained-about banking and credit firms, the rest of the list is largely made up of the respectable, household names that you find on any high street.
As the director of one short term loans company put it,
“We are not looking for sympathy. But we are looking for fair play.”
Could one or more payday lenders follow Wonga?
The answer to that question has to be ‘yes.’ As the most high-profile lender Wonga was always likely to attract the lion’s share of the complaints: but if the claims management companies conduct widespread phone campaigns – and are even prepared to submit claims with fictitious names to the ombudsman – other companies are bound to come under pressure.
Will lenders pull out, especially if regulation is tightened?
Again, the answer has to be ‘yes.’ Many short term loan companies are US-owned and they may simply decide that the risk/reward ratio of being in the business simply does not add up. There is always a tendency for regulators and politicians to want ever-tighter regulation, but common sense and economic reality tell you that you cannot demand the same level of regulation for a £250 loan over four weeks as you can for a £250,000 mortgage over 25 years.
What happens if short term credit is not available?
There is a simple truth that we have repeated many times in these articles. You can regulate supply, you cannot regulate demand. As has been written recently, ‘if you are living paycheck to paycheck and your car gets a flat tyre, a short term loan can be the difference between getting to work and not getting to work: between keeping your job and losing it.’
There will always be a demand for short term credit: people will always need help through difficult times. And as the BBC wrote in a recent article, ‘the Bank of Mum and Dad will run dry.’ As wages continue to struggle to keep up with inflation, parents may not have short term cash themselves.
Far better that the demand for short term credit is met by a regulated industry than by back street money lenders, who will not only charge an extortionate rate of interest but may also demand some rather unusual forms of security…
Short term loans are not a long term solution to money problems – no-one is pretending that they are – but we have all been at a financial low point at one time or other in our lives. A controlled, regulated industry operating to ethical standards is a far better solution than the unregulated alternative that the current situation threatens.