Tuesday, June 14, 2011

Wonga – the modern day loan sharks

It’s late at night. You’ve parked your car a bit further away from the Cinema than ideally you would have liked and it didn’t look to be as secure a car park as you are used to. But you expect that it will be alright – an expectation that is swiftly disabused as you approach the area where your car is and you spot a seriously threatening bunch of young men around it. This looks like trouble – and it is. There isn’t much wriggle room – the power is all on one side, and it isn’t yours! Your choices are limited and for once your mind takes over. You know that you have only one desirable outcome – to get the hell away with your life, your health and your car intact. It’ll cost you and what was ten dollars for three hours parking swiftly becomes a hundred. Cash. Used notes. Handed over to the boss of the gang who graciously moves aside, wishes you well and points your route back to the highway. Extortion? Of course it was. And did you have a choice? Nah!

And that, in essence is the offer from Wonga.com. They will loan you money to tide you over when your cash flow is weak. Your payday is a week or so away and you haven’t the readies to pay the bills. The rent collector is at the door. The cupboard is bare. And the horse at Chepstow is still running! You don’t get the credit cards any more – not after that unfortunate County Court Judgment. You’ve got a job alright – at minimum wage - but outgoings, what with the young kid and the Partner’s mother’s problems don’t match to income. And that’s where the nice people at Wonga come in. They are the lender of last resort – well almost the last. There aren’t dudes in sharp suits and shades coming menacingly around every week to collect the repayment of your loan as once was the only option. No these Wonga guys work only online and it really is dead, dead easy to borrow. To get £100 to tide you over for a couple of weeks costs you a bit – you repay them £121.11 at the end of the fifteen days in that oh so brief period after you are paid when you’ve actually got some money coming in. So for every day that your £100 loan is in place you pay Wonga £1.40 – which means on an annual basis you’d pay £511 for that £100 loan. Loan £100. Interest £411. Interest rate a wee bit over 4000%!

But Wonga say their customers don’t keep their loans for a year or anything like that period. But that doesn’t mean that the interest rate is any different. They charge over 4000% whether you borrow for 24 hours or 24 days – or longer. The Wonga business model isn’t that interested in the individual – actually they don’t care at all. They know that to con one punter into paying £21.11 to borrow £100 for fifteen days is no big deal. It even, put like that, doesn’t sound too extortionate. But multiply that one punter by thousands and what you have is an institutionalised and highly profitable con trick. The interest rate applies to all – which means that the income stream accrues nice and reliably. Challenge anyone to borrow at say 3% (a couple per cent over bank rate) and loan at 4000% and they will make money – lots of it! The boss of Wonga, Errol Damelin, says that he is “debt averse” – that he finances his operation from equity and profits. Well no surprise there - obviously. The cash flow of the Wonga business is so extraordinary that there can be no need to borrow. But any accountant will tell you that the real value of the cash they loan is roughly equivalent to Bank Rate plus a small premium. 3% at most!

So just like the crooks demanding money from you to let you repossess your car Wonga preys upon the vulnerable that have no choice. Credit Cards today charge you around 17% – a bit more if they perceive you as a risk. Wonga charges you an interest rate that is around 250 times that rate. And the law allows them to do it! The modern day loan shark doesn’t work wearing dark glasses and with some heavies to threaten you on the doorstep. But they are no less venal and our society is much the poorer that it allows the like of Wonga.com to exist.

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