Cash strapped UK consumers are being given an alternative to traditional retail bank overdrafts and kneecap-adjusting loan sharks.
Wonga, a youthful and Gen Y-styled brand, is offering a seemingly attractive short-term loan facility to customers, yet given regulatory demands the group is forced to highlight its typical APR (annual percentage rate) on its website – a staggering 2689%!
The business specialises in ultra short-term loans of up to £400 initially and increasing to £1000 – depending on how punctual a person is in paying off their initial loans through the group.
A visit to the group’s website reads very light and fluffy but the truth of the matter is that the group is generally providing a service to people who are desperate and arguably likely to default on any repayments.
A 30-day loan of £400 pounds would cost £525.48 after 30-days – not too bad I guess if you need that £400 really bad the month previously!
Anyhow, Wonga tries to debunk the notion of APR with some very friendly chatter and in essence suggests that APR is a calculation that is best ignored for short-term loans…
“It’s understandable to question any crazy number like this [2689%], especially when it comes to borrowing. But it’s our unconventional and consumer-friendly approach to lending, combined with the mismatched annual nature of APR, that makes it so mind-bogglingly big. If you don’t believe us, just check out the calculation we need to make,” Wonga says on its website.
Wonga deflects the idea of APR by applying it to a number of other general transactions people enter.
Meanwhile, failure to repay a loan on time – a problem often faced by people who buy consumer goods on deferred payment agreements i.e. interest free or no repayments until further down the track – means in addition to a £20 penalty the rate keeps accruing at the same high rate.
But this shouldn’t deter would-be customers because they can have the money in an instant.
London-based Wonga states that it can have the money a customer needs in their bank account within 15 minutes – or it will send £10 cash back to them.
Is such quick access to funds a good thing or a bad thing?
Of course the group has a right to command a higher fee for lending in such high risk situations, and for the majority of clients we’re sure repayments are prompt and manageable.
However the fact the recent credit crunch was spawned from so-called easy lending suggests that this scheme, while helping many individuals with access to funds they are unlikely to access through other means, is likely to create bigger problems for people who are already in financial difficulty and simply add an unnecessary debt for such a trifling initial outlay.
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