More woe for Wonga it appears.
Less than a week has passed since the payday lender announced that it was writing off £220m of debts for 330,000 customers after putting in place new affordability checks, the Advertising Standards Authority has banned one of its TV adverts as it breached regulations by not revealing the loan’s interest rate. All this on top of announcing that profits had fallen by more than half back in September, blaming ‘remediation costs’, and of course the slamming it got in June after the FCA found it had pressurised some 45,000 customers into repaying loans by sending letters from non-existent law firms chasing debit.
Do I hear any murmurings of sympathy? No, I didn’t think so.
In my opinion, payday loans are unsuitable pretty much across the board. While Wonga has been the industry’s whipping boy, perhaps the FCA’s clampdown on payday lending, capping interest rates, limiting the number of times a loan can be rolled forward and requiring more effective checks on affordability will start the tolling of the bell for all of them.
These curbs, in theory, should more or less put almost all payday lenders out of business. Capping the interest rate alone is enough to cripple a business model that has fundamentally relied on charging huge interest rates relying on the gullible to pay for those who defaulting. New stricter lending criteria will mean that these companies will be able to accept far fewer applications, thereby eating into the critical mass they need to make the model work.
There is undoubtedly a need for hard-pressed people to have access to short-term credit – but it has to be managed responsibly rather than viewed as a way to make some easy cash from the desperate. Interest rates applied by payday lenders in the US, where this type of lending originated, are generally limited to 40%. If their UK counterparts had been less greedy, they could have carved a niche for themselves in the market and become recognised as a responsible source of assistance to those struggling to get credit from their bank.
As banks have learned the hard way following the boom and bust of the noughties, affordability should be at the heart of the credit process whether for a mortgage or a personal loan and any company offering credit must adhere to this simple ethic of lending responsibly.
Now much needed change is being forced upon the payday lending market. If it can no longer rely on revenues from customers paying extortionate rates of interest without fully understanding the implications, the question has to be asked whether they can adapt their model sufficiently to survive let alone thrive.
I for one won’t shed a tear if they fail.