Today I had the television on in the background while I did some chores around the house and an advert for Wonga caught my eye. Wonga is a loan company who specialise in relatively low value, very short term loans. It wasn’t the product which caught my eye – but the eye-watering APR of their products: typically 2689%. Yep, 2689%. Wow!
I tweeted about how this was nearly 100x more than my (fairly high APR) credit card. It turns out that Wonga have a rep on Twitter – WongaWoman. She replied and explained that their loans are v short term, so I thought I would do a bit of research.
They have a page on their website which is dedicated to explaining why their APR looks so ridiculously high. It goes in to detail about how APR is an annual indication, and that they feel it is unfair to use an annual indication as a comparison, when essentially the products (theirs & a standard loan) aren’t the same. I sort of agree, but they are obliged to state their APR because of the law, and it does show that if you borrowed this money over a year it would be incredibly expensive.
Credit where it’s due.
To their credit they are very upfront about how much it costs to borrow their money (they give a total repayment figure before you take out loan), and they seem a robust responsible lending policy which sees the amount available to you rise as you use the service. They are also filling in a gap in the banking sector where the big retail banks don’t operator. In addition they make a donation to a poverty fighting organisation (Kiva) for every loan they process. They have one numerous industry awards too by the looks of it; and given their response it’s not like they are trying to hide.
Extortion or Bad APR?
In the wake of the credit crisis many questions were asked about the lending practices of the banks, and more about “payday” loan companies and similar. There was even moves by several members of parliament to put an absolute maximum APR into law, they cited sample APRs which were not dissimilar to the rate which Wonga charges; and they called it extortion.
Is it really Extortion, or is APR just not a good comparator for these type of loans which do have a different feature set and audience to traditional bank loans? If we did have a law to stop extortionists and it were to be based on APR how could we still allow legitimate and upfront businesses like Wonga to operate? Or should we allow lending with such high APRs…