High-cost credit/payday loan companies, whose turnover is estimated to be £2.2 billion per year, are coming under pressure both for their lending practices and for the way they advertise.
In June Wonga raised its typical APR from 4,214% to 5,853%. Companies have been criticised for using cute advertising characters – such as Wonga’s “straight-talking” elderly characters the Wongies - and taking out slots during children’s TV.
Representatives of three of the biggest companies, Wonga, QuickQuid and Mr Lender, appeared before Parliament’s Business Select Committee on 5 November to answer questions. They insisted that they carry out rigorous checks on who they lend to and only lend when they are certain people can repay loans. They defended their exorbitant interest rates by saying that people only take out small loans for a short time.
Yet a report by the Office of Fair Trading (OFT) earlier this year showed that a third of loans taken out in 2011/12 had been “rolled over” (extended beyond the original term agreed, often incurring extra fees) at least once, and that rolled over debts accounted for almost half of lenders’ revenues. Nearly 20% of firms’ revenue came from the 5% of loans rolled over four times or more.
Alarmingly, the big companies such as Wonga represent the more “ethical” end of the market. There are more than 200 regulated payday loan companies in the UK, that is, companies operating with a credit licence. Below such companies exist innumerable unregulated loan sharks and fly-by-night operations taking advantage of the inability of poor people or people in crisis to access other credit.
The OFT report addressed the 50 leading payday lenders that account for 90% of the UK market with its concerns; several left the market at once and three had their licences revoked.
The regulated sector as a whole has gone from £900m in 2008/9 to £2.2bn today.
Wonga’s fortunes have soared during the recession, from £14.1m in 2010 to £59.2m in 2011 and £84.5m in 2012. Wonga now has an advertising budget of £16m per year and recently released a half-hour film, “12 Portraits”, by a BAFTA-award winning director in which satisfied customers share their stories.
Companies such as Wonga say they have a high customer satisfaction rating, but for those payday loan customers who cannot pay back their loan misery looms, and their numbers are rising.
Citizens Advice Bureaux report a 10-fold increase in the use of payday loans between 2009-10 and 2013.
They cite a typical example of someone approaching them with problems:
“An 18-year-old unemployed person who received a payday loan of £50 to pay their mobile phone bill, despite telling the lender they lived on just £208 a month. After repaying the loan, they took out another and kept receiving texts and emails offering more. After three months they had loans of £500 coupled with interest charges of £300.
"Borrowers who hoped for a bit of cash to tide them over are now harrowed by debt and find themselves in a vicious cycle of payday loans, without any sign of a way out."
Unlike in many countries, in the UK the interest rates that companies charge is not capped.
The Money Advice Service in their annual Christmas spending review found that one third of UK adults will pay for Christmas this year using credit cards and 1.2m people plan to take out payday loans. Almost one in 10 adults is still paying for Christmas 2012. The Public Accounts Committee recently estimated that about two million people in the UK use payday loans.
The increased scrutiny of the sector by public bodies – including the Advertising Standards Authority, OFT, Financial Conduct Authority and Competition Commission – is good though overdue and still far too lenient. More to the point, it does not begin to or even aim to address the core problem that allows the loan sharks to thrive: too many people in the UK have too little money and, increasingly, are forced to borrow in order to make ends meet.
Labour leader Ed Miliband recently criticised what he called “the hidden Wonga economy”. Speeches and hand-wringing are not enough.
The Labour Party and trade unions should put forward a political programme to guarantee jobs for all at a living wage, and adequate benefits for those unable to work.