Saturday, July 27, 2013

Wonga - exploiting the poor and the vulnerable

Wonga and their like would not have a business if there were not poor and vulnerable people to exploit. These people go to Wonga because they are the lender of last resort. Those of us who do not need to use these companies also sometimes take out short term loans. We call them overdrafts on our bank accounts, or we choose not to pay off our credit card in full one month. For this we pay interest of perhaps 20% APR maximum. That rate is the cost of short term credit - when financial institutions can borrow at say 3% it provides them with a decent return. The borrow/lend margin covers the lenders risk and provides them income. 

But the Wonga target market can't get overdrafts and they don't have credit cards. They live hand to mouth and they struggle. Can you imagine what this must be like? Can you imagine what it is like in the 21st Century in one of the richest nations on the planet not to have enough money to feed your children? Most of us would react with compassion to these people. Not Wonga. They see a profit opportunity and know that the offer of a short term loan will be jumped at by some and that they can charge what they like - and they do. So they have finance available on the markets at say 3% and they lend the money at rates a thousand times more. Yes a thousand times more. That it is for a short term is completely irrelevant. Tens of thousands of poor borrowers all paying 5000% interest generate millions of windfall returns for the lender. It's not usury - it's fraud on a massive scale.

There is of course an alternative as the Archbishop has pointed out. It can be done. Loans made at a fair rate (Say 20%) with a premium for risk and the higher admin costs (say 10%) would be perfectly viable. It is for Government to act. That is what Government is for in a civilised society - to protect the vulnerable and help them. Instead we have a Government which sits on its hands. I hope Mr Welby shames them into action and that Wonga and their like become a grubby footnote in our history.


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