Soaring profits have prompted a swathe of criticism, but Wonga is just a showcase company for Britain’s reliance on debt.
By Nathan Lee, Financial Analyst
Public outrage over pay-day lenders has been sparked once again by the (shocking) revelation that Wonga is making lucrative amounts of money from debt.
But above the widely misconstrued APR rates and easy credit conditions, one must ask whether people are pissed off with short-term loan providers or just venting their frustration over Britain’s reliance on debt?
Long-term bank lending is not the lesser evil of short-term lending, in fact, they’re comparatively the same thing. A £100 loan over ten days from Wonga costs £26.60 in interest and fees compared to a £10,000 loan over ten years, which costs £2,887.
Although the APR charge on the short-term loan is 2,452% higher than the long-term loan, the relative profit margins are almost identical (26.6% compared to 28.9%). To clear things from the start, charging hundreds of percent APR on loans less than 60 days long is perfectly understandable.
Providing easy access to credit is a dangerous thing indeed, but following a financial crisis of epic proportions which was built on easy credit access, Wonga can hardly be called a ‘founding father’ of the debt market. Chief executive Errol Damelin has defended the company on release of their annual report, saying they turn down two-thirds of those who apply for loans and are “disincentivised” from taking decisions to lend to those in financial trouble. Whether there is truth in that or not, the point is that offering credit to the vulnerable predates money itself.
In my judgement, people are pissed off at Wonga because they showcase Britain’s reliance on debt. In the “must have it now” generation, their apps and interactive online tools put easy credit on a pedestal, which is exacerbated by soft-touch marketing campaigns which project innocence when dealing debt in a cut-throat market.
Turnover should be a side-issue in their 2012 annual report. What’s most disconcerting is that Wonga’s customer numbers are up 61 per cent to more than one million and the total number of loans provided is up 54 per cent to four million.
Their results collide with a survay from uSwitch.com which found a quarter of borrowers in Britain, some seven million consumers, will not be able to pay off their non-mortgage debts for at least three years and seven per cent – some four million consumers – believe that they will never be debt-free.
Wonga may be showcasing the dangers of credit more transparently than your average high street bank, but they don’t operate under a different paradigm and are no more culpable than their high street counterparts for the country’s debt spiral.
As Archbishop Justin Welby looks to rival pay-day lending, one get’s the sense that Wonga is merely the tip of the iceberg, waiting for the Titanic to hit.