Tuesday, 12 November 2013

Wonga – the new bad boy of finance?

Wonga has been grabbing headlines for the wrong reasons but who is really to blame?

It is not a good time for finance firms of any guise to be making too much money at the moment.  So the British short-term lender Wonga attracted the wrong type of attention when it announced record profits of 65 million pounds for 2012.  Everybody from Ed Miliband, the Labour Party leader, to the Archbishop of Canterbury have lined up to vilify Wonga for making money out of people who have fallen on hard times.  Wonga, who offer loans of small amounts for a period of up to 30 days, have hit back with a slick new promo video telling the stories of some of its customers.  Is Wonga as bad as they say or is the recent controversy just a bit of name calling to grab some headlines?

Among the numerous criticisms, perhaps the most commonly heard are to do with the eye-wateringly high interest rates which work out at 5,853 percent (as stated clearly on the website).  Yet the short periods of borrowing mean that interest payments are typically small compared to the amounts involved - a typical loan of 200 pounds for 15 days incurs fees and interest of just over 36 pounds.  But 200 pounds would explode out to over 10,000 pounds over 12 months so any mishaps which delay repayment have the potential to spiral out of control and result in massive debts.

So why would people risk this in the first place?  A bit of extra cash when we are short might save us even more money than the cost of the loan when caught in a spot of trouble or might stop us from missing out on a big night out with friends just before payday.  The choice to borrow or not to borrow is one that each of us is free to make (with full disclosure of charges from Wonga).  What the long line of Wonga critics are instead condemning is the fact that so many people are choosing to take out loans through firms such as Wonga.

Wonga is a symptom of and not a cause of a society that spends at will and may not always have money left at the end of the month in case of emergencies.   Life was not always so free and easy - access to any extra cash used to be limited to only those on good terms with their bank managers.  But new ways of getting cash, such as credit cards and short-term loans, have provided money to the masses.  We should be thankful to have it if we need it but better management of our finances might mean that we would be thankful not to need it.

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