As mentioned above, this article will take a look at the future of payday lenders due to the Wonga troubles.
The history of Wonga
Wonga was originally founded in 2007, just before the credit crunch and the recession in 2008. The company offered easy access loans with repayment terms within 30 days. The concept of payday loans was originally founded in the 1980’s in the USA, when interest rates were deregulated and higher repayments could be demanded. However, payday loans became much more popular in 2008. This popularity followed the failure of Lehman Brothers, when obtaining credit through traditional means became much more difficult.
Wonga reached its peak of business in 2012, when they were seeking to allow instant approval of loans 24/7. The cost for Wonga customers, however, was heavy, with interest rates exceeding 4,000% per annum. Loans of a couple of hundred pounds could quickly spiral, leaving the customer owing thousands. At this peak, Wonga had over 1,000,000 customers in the UK, around 2% of the adult population.
Following this, payday lenders pushed their advertising too far, trying to appeal to consumers to take out their loans to buy luxuries. One of the most criticised campaigns was appealing to students, who would clearly struggle with repayments, to take out loans to go on holiday. 2014 was a particularly bad year for Wonga, which posted losses of £37m following profits of £84m two years earlier:
- Customer numbers had dropped to 575,000.
- The FCA applied affordability criteria to loans granted, forcing a write off of £220m of loans.
- The FCA capped interest rates at 0.8% per day and default charges at £15.
- The FCA fined Wonga £2.6m to be paid in compensation to customers for using fake debt collection firms.
Losses increased to over £80m in 2015 and continued into 2016. Despite a cash injection of £10m from its shareholders, the payday lender fell into default and entered administration after almost a week of speculation over its position.
The future of payday lending
Following the FCA changes in regulation, payday lending has already started to evolve into a more customer orientated setting:
- Loans are now generally repayable over 6 – 12 months.
- Affordability for repayments is now considered.
- Guarantor loans have also increased in popularity.
Interest rates continue to be high for pure payday loans, still at over 1,000%. This is likely to continue to hold the industry back. The market has taken more to guarantor loans, where interest rates are in the region of 50%. These loans can now be taken over 3 years, making them much more appealing for those with a poor credit rating.
In addition, there has been a significant rise in the availability of credit from more traditional sources. Credit cards are becoming more widely available again, with many firms offering 0% on transfers for 2 years or more. This allows consumers who are deemed credit worthy enough to effectively park debt by juggling their credit commitments.
Unless interest rates drop further, the payday loan may have seen its day. In the USA, where payday loans were created, many states have now banned these loans from being issued. The question remains whether the rest of the world will follow suit.
What if I still have a Wonga loan outstanding?
A common misconception is that when a company enters formal insolvency it ceases to exist. Therefore, the debt due to the company is written off. This is simply not the case. The insolvency practitioner appointed over the case has a duty to creditors to realise all assets to raise funds for distribution.
Customers of Wonga will still be expected to continue to make payments in line with their credit agreements, even with the company in administration. Customers should also bear in mind that, depending on the stance of the administrator, they may accept an offer of lump sum settlement at a discount. This is to save the costs of collecting and chasing the loan over time.
What if I’m owed compensation by Wonga?
With Wonga now in administration, those who are still due compensation may be wondering how they would get paid. Under normal circumstances, when a company goes into administration, anyone with a claim against the company would be an unsecured creditor. This can leave them amongst a pot of hundreds, or thousands of other creditors. These are also unlikely to receive a return, with preferential and secured creditors being paid first.
In the event an FCA regulated firm enters formal insolvency, the financial services compensation scheme (FSCS) will cover any amounts due in compensation up to £85,000. Generally, the FSCS covers:
- Banks and Building societies
- PPI claims
- Insurance products
- Investment advice and products
- Mortgage advice
- Credit unions
However, the FSCS does not cover long agreements and compensation surrounding these agreements. Therefore, anyone still owed compensation will have to wait to see if there will be any distribution to unsecured creditors in the administration, regardless of how far the claim has progressed.
The team at Business Rescue Expert have dealt with multiple FCA regulated companies who have experienced financial difficulties and can be contacted for expert advice if you have an FCA regulated business experiencing similar difficulties to Wonga.