The bad and good of Wonga

 
wonga website

In many ways Wonga.com is an impressive, even admirable business (and please resist your temptation to send me hate mail - I am feeling delicate).

It is, for example, funded exclusively with equity capital, or £100m genuinely at risk of being lost if things go wrong.

So, unlike a bank, it has no depositors or creditors who can pull their money out in a panic and bankrupt it.

If all lenders were financed in this way, we wouldn't have had the banking crisis of 2007-8.

Also its technology, unlike our banks, is world class.

Wonga has written algorithms, computer programs, which determine whether you deserve to be given a loan in seconds, from looking at details about you and your behaviour, such as what email service provider you use and whether you have bothered to look at the company's terms and conditions.

The proof of the robustness of this automated credit assessment is that it rejects 60% of applicants and has a default rate on its wholly unsecured personal loans of just 7.5% - which seems remarkably low, since Wonga is by definition lending to those who have exhausted their ability to get money from conventional sources.

Nor is it possible to say that what it charges for its per-day is hard to understand.

The interest rate is 1% a day, with a £5.50 transmission charge, for loans of up to £1000. Its typical loan is £200 for 15 days.

And if you go to its home page or mobile app (and in a way I would hope you haven't found the need to do that), it is staggeringly easy to see within seconds how much it will cost you to borrow what you want for the time period that suits you.

If only bank charges were so transparent.

Start Quote

The case against Wonga would be that there is something wrong with an economy that creates such huge demand for its very expensive money”

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So any criticism of Wonga would not be that it is a risky, or poorly managed business.

Arguably, given the way it is now expanding overseas and also getting into small business loans and creating a new product a bit like a credit card, it is impressively entrepreneurial.

The case against Wonga would be that there is something wrong with an economy that creates such huge demand for its very expensive money.

Its simple 1% per day interest rate equates to an annual percentage rate of interest a touch shy of 6000%. This is very, very, good business for Wonga and its venture capital backers - and a manifestation of the powerlessness of those who borrow from it.

If you hate Wonga, you are probably railing against a world in which millions of people find themselves desperate for money in the course of a year, and have nowhere to turn but a business charging an eye-wateringly high rate of interest.

Now there are so-called payday lenders (Wonga, by the way, insists it is a short-term lender, not a classic payday lenders) which are more rapacious and less transparent than Wonga.

And maybe the investigation into their practices by the Competition Commission, which has been announced today, will rein them in to an extent.

But if you hope that investigation, or indeed regulation and supervision by the newly created Financial Conduct Authority, will somehow eliminate the market for Wonga, or indeed destroy it as a business, well you may be guilty of an admirable but unrealistic naivete.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 536.

    There is nobody forcing people to take out loans from entrepreneurial Wonga - and to avoid moral hazard we must make them take responsibilities for their own actions. Most of these people have more than one kidney, eyes and organs that could be sold to the NHS to save responsible sick people.

    Dear God, I hope you lot understand sarcasm ...

  • rate this
    0

    Comment number 535.

    Firms like Wonga are no more than legalised crooks preying upon low wage Britain by peddling loans at blatantly extortionate interest rates .. they are charlatans run by Essex wide boys who, in another life, would have been selling dodgy nylons. For a premiership club like Newcastle, in a deprived area, to be sponsored by Wonga is shameful and, for that, they deserve relegation ..

  • rate this
    0

    Comment number 534.

    Someone came up with the good idea to start "Pay Day Loans".
    To this day,the inventor has never been identified.

  • rate this
    +1

    Comment number 533.

    522.marchino

    How much freedom of choice you have depends upon how much money you have. The more money you have the more choice you have. The more money you have, then the more power you have. The difference in earnings between the highest and lowest paid in this country can not be logically defended in any way. It is actually insane and it is the fault of all governments that it like that.

  • rate this
    0

    Comment number 532.

    529.TaperingTheTruth
    All profit is exploitation - once you understand that you will no longer have dilemma's about free will and nanny states.

    Sounds like you're all for the nanny state then. How else could you outlaw profit?

  • rate this
    0

    Comment number 531.

    I see the tri-partite schemers of Government, media and the banks are preparing to screw the public yet again.

    Since when was the break even price for Lloyds 61p?

    This is inaccurate - and coincidently, just as I predicted.

    Good thing I've stopped paying tax because I would not want to be contributing to such a blatant scam to rob taxpayers of their money.

  • rate this
    +2

    Comment number 530.

    Perhaps it's also worth considering the psychological effects of debt? Most of us remain hopeful and motivated until a problem becomes too big to overcome.

  • rate this
    0

    Comment number 529.

    520.blacksheep44

    All profit is exploitation - once you understand that you will no longer have dilemma's about free will and nanny states.

    525.That_Ian
    True - they don't start the poverty - but they keep it going - for their own gain - which is immoral whichever way you look at it

    People will think differently when the spivs start to corner the commodities market to exploit our needs

  • rate this
    0

    Comment number 528.

    Labour relaxed gambling laws and we now have multiple betting shops on run-down high streets.

    We also have pay day loan companies next to them as well.

    Are the two linked?

  • rate this
    0

    Comment number 527.

    The problem with Wonga is not that it exists,but that they continue to overvalue their wares,this takes money out of the economy that the person or persons would use to buy more, even if only food essentials that would actually add some stimulus to the economy,improving the economy reducing their risk of borrowing

  • rate this
    +2

    Comment number 526.

    @519.BGD
    I respect your point of view as an investor. But the view of business has no social responsibility cannot be agreed. Its like justifying selling drugs to an adult and labelling it as harmful. To me Pay Day loan is no different than drugs. Both are addictive and both are harmful to society. Its encouraging a person to live in debts beyond his means, that's unhealthy to a nation.

  • rate this
    -1

    Comment number 525.

    521.Averagejoe

    Joe, you are shooting the messenger here. Existence of the payday lenders is a symptom and not the cause of poverty in this country.

    Actions of both this and previous governments have done nothing to alleviate the problem. Gideon is actually hell bent on exacerbating the situation.

  • rate this
    0

    Comment number 524.

    504.Uselessness
    The real issue is why we have so many desperate people in the UK.
    510.where am I
    It wont happen because it would mean no low skill manufactoring jobs left, its why it hasnt already been done.
    ~
    It may HAVE to happen. It could be that in a mature economy we have pushed the taxtake & c.o.living too far maj of popn.

  • rate this
    +2

    Comment number 523.

    Why don't people get together and offer a more ethical and reasonably priced service?

  • rate this
    +1

    Comment number 522.

    @511

    It's the difference between freedom of choice and the government telling you what to do.

  • rate this
    0

    Comment number 521.

    Another example of the tool (debt) through which the rich get richer and poor get poorer.

  • rate this
    0

    Comment number 520.

    To continue the thread of demonising what are ultimately legal companies and practices:

    What do people think about the likes of on-line betting sites? Do they prey upon the desperate?
    What about the tobacco companies? Is smoking more common amongst the working class?
    What about sales of cheap booze? Who are their target market?

    Nanny state vs free will?

  • rate this
    -2

    Comment number 519.

    As an investor I am very disappointed I did not have a chance to invest in Wonga. The cirticism of them is very unfair and I agree entirely with Robert's article.

    Grown up people are responsible for their own actions if they want a loan or not and Wonga makes it completely clear EXACTLY how much it will cost them.

  • rate this
    0

    Comment number 518.

    @512 Marchino - impressed by simple Wonga not compounding the interest because that's what makes short term loans so dangerous? Agree the terms are very straightforward but surely it is not understanding the cost of the money borrowed, or not being able to avoid having to resort to paying this level of interest is
    what makes these Loans so dangerous? A 1% charge per day is enormous!

  • rate this
    -1

    Comment number 517.

    Great business model for investors and clever IT, Robert? Absolutely. What about the effect of bleeding the poorest communities with punitive interest rates? Why does the BBC give no coverage of the not-for-profit lenders (CDFIs) or pour money into disadvantaged communities to create financial independence?

 

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