Wonga, the company that has for so long been the flagship of an industry that prides itself on offering virtually instant, no-questions-asked loans, said Tuesday it had suffered losses of £ 37.3million last year.
The company says the losses are part of its efforts to solve “the problems of the past” and to “repair our reputation and gain an accepted place in the financial services industry.”
This, combined with news from last month that the payday loan market is start to contract, seems to be a clear indication that the new, tougher Financial Conduct Authority (FCA) rules are starting to bite.
Much of the debate has now shifted – and rightly so – to what happens to people who can no longer access payday loans. The response from some quarters, especially the payday lending industry, seems to be that those excluded from this market, and from general credit more generally, will end up in the hands of illegal loan sharks.
While this is an understandable fear, there is little evidence to back it up. FCA research has shown that people are unlikely to go to illegal lenders. Only 5% of clients who turned down a payday loan said they would even consider a loan shark.
What we’ve seen at the StepChange charity over the past few years is that payday loans are a very destructive form of credit that traps people in downward borrowing cycles and is often used to make them even more financially vulnerable.
Last year, about 12,000 of the more than 75,000 people who asked for our help with payday loan debts had at least five of these loans. The infamous story these clients tell us is how they took out a second payday loan to help pay off the original loan, and a third to cover the second, and so on, and so the debt gets bigger. in addition to deep and unmanageable.
Much of the emerging debate about what will follow in a post-FCA payday world seems to be based on what our charity believes to be the flawed premise that people who cannot access payday loans simply need of a different type of credit. The point is that for many people already in financial difficulty, any form of additional borrowing (especially one where the repayments relative to income are so high) is likely to make a bad situation worse. We need more affordable forms of credit, but we must not kid ourselves that high risk loans will never be cheap.
Basically we have to find a way to help people get back on their feet financially.
Better regulation of the payday lending industry is good news, and we hope that the era in which businesses were allowed to put profits before good results for their clients is coming to an end. But tighter market regulation is only half the story. Tackling the demand for such loans and, more broadly, questioning the idea that the answer for people in financial difficulty is that people borrow is the next step. Credit can give people the illusion of a financial safety net, but too often it is a trap. We need to do more to help low income people save, since most tax incentives to save go to middle to upper income earners.
People who experience financial difficulties can easily find themselves trapped in a vicious and unsustainable cycle of borrowing, using more credit to pay off the credit as they get worse. This is as true for credit cards and personal loans as it is for payday loans. Early intervention, advice and support to help people cope with their debts in a sustainable and affordable way is one of the best ways to do this. The government recently announced its intention to hold consultations on proposals that would give people a “breathing space” through guaranteed freezes of interest and fees when they take action to tackle their debts. The next government must complete this review and help break this never-ending cycle of borrowing.