There’s outrage on the streets: headlines scream about 3,000% loans and iPhones, bloggers talk of “usury in hyperdrive”.
What’s it all about? Well, to put it bluntly, Wonga.
Wonga, a short-term loans firm, has launched an application for the iPhone. This company has been around for a couple of years and lets people borrow up to £1,000 (£400 for new users) for up to 30 days.
And for people in a tight spot, it even promises to get the money into your bank account inside 15 minutes or take £10 off the cost of your loan. Wonga estimates almost 750,000 applications have been made to it in the last two years, although doesn’t yet know how many people have downloaded its new iPhone application.
Why the headlines?
The problem is the APR, or annual percentage rate. Because Wonga’s typical annual percentage rate, as stated openly on its website, is 2,689%.
Combine that with an iPhone application, which means you can apply for a loan from anywhere with a mobile phone signal, and newspaper editors have been getting excited.
Much of the coverage suggests that the idea that someone can take out their phone and get a loan at any hour of the day or night and then head to a cash point to collect the money almost immediately is frightening.
People are being exploited, say the papers. And this naughty firm is making thousands of per cent interest from this vulnerable group.
Is it really a bad deal?
The problem here is the “A” in APR. Because of the nature of a short-term loan, you simply can’t take it out over a year: 30 days is the maximum Wonga offers. But the way APRs are calculated doesn’t reflect this.
A look at the cost of a loan, rather than a theoretical “annual” rate, puts things in a different light.
A £200 loan, taken out for four days, costs you £13.61 in charges and interest – £8 interest and £5.61 in charges. That’s not cheap, but it’s also not extortionate. Considering banks and credit cards charge you either one-off fees for going over your credit limit (between £12 and £40) or a set charge each day (typically £5), Wonga compares quite well.
Taxi for one
The way to think about services like this is using taxis. Let’s say you mistakenly left your rail season ticket in the office before going out for the night. It’s now 11pm and you need to get home, but a black cab, in London at least, will cost you as much as £12 for a journey of two miles.
That’s a lot, but it’s still cheaper than jumping on a train without your ticket and being charged a penalty fare of £25 (rising to £50 if you don’t pay it quickly).
Of course the sensible thing to do is to plan and make sure you have your ticket to get home, but for those stranded, the taxi is cheaper than a penalty fare.
Short-term loans should be looked at like that.
No one would suggest that you should compare the cost of taking a taxi 24 hours a day, 365 days a year, and then not take it because that would cost you more than your annual train ticket.
But that’s effectively what the headline-writers have been doing over the new Wonga iPhone application: applying an annual rate to a short-term solution.
Targeting vulnerable people
Another criticism is that this short-term loan targets vulnerable people. Lending to those who can least afford to pay the money back. It’s a concern that many have, especially as this deal is arranged and completed so quickly.
Wonga defends itself on this charge by pointing out that it rejects between eight and nine people out of every 10 that apply for a loan. It only forwards cash to those that can most afford to pay it back and only lets people borrow larger amounts after they have already used the service and paid the money back in good time.
The site is “still super-selective about who we lend to”, Wonga communications director John Moorwood told MSN Money in a telephone interview.
Of course there’s another point to make here. To use the iPhone device you need to own an iPhone. Not something many people struggling to make ends meet can say.
Wonga charges interest 1% a day – plus £5.61 arrangement fee – to people borrowing money from them. There is no penalty to paying cash back early.
The late fee is £10, with interest of 1% a day continuing to accrue. If you still don’t pay the money back fees go up again, with total fees capped at £105 for failure to pay back debts.
However, Wonga denies that it is exploiting people.
“We would basically freeze interest and fees as soon as possible on anyone who’s having difficulty repaying and engages with us to agree a sensible/reasonable repayment plan,” Moorwood told MSN Money.
“Maybe split a £235 balance over a few months for example, as long as both parties are happy.”
Should I use this then?
Is this service a good option? Probably not, unless you have no real alternative. Like the taxi example above, the most sensible thing to do is plan ahead in the first place.
If you have cash, savings or spare capacity on your authorised overdraft or credit card then all of these options are cheaper. If you have friends or family willing to lend a bit of cash for a few days that could also be cheaper (depending on the friends or family in question, of course).
If you don’t have any cash reserves, then I would strongly recommend you take action now rather than waiting until an unforeseen event catches you out.
However, if you do find yourself in a tight spot, and are accepted by them, Wonga is far from the worst option in the world and certainly not deserving of the tabloid ire it has seemingly provoked by creating an iPhone application for an existing service.