Are the “wonga scam” claims true?
The question being asked by many “is Wonga a scam?” in these difficult and challenging economic times, regarding pay day loan companies and the extortionate APR rates they charge. Are they exploiting the working classes or are they providing a new ‘lifeline’ service when they are in need of quick cash?
I have scoured the internet seeking reviews, articles, testimonials and examples to answer this question.
Firstly (using the words of Errol Damelin, chief executive of Wonga in interview for the Guardian newspaper) explaining what a pay day loan is – “we can provide a small, short term loan whenever you have an unexpected expense or want to make an urgent purchase. Application is entirely on-line and you can choose the exact size and length of the loan before proceeding. We’ll give an instant decision and, if accepted, you can have the cash in your account within minutes”
So I now have a better understanding of exactly what Wonga, as a pay day loan company, states that it provides and defines as their service.
So that is what the chief execute states, but are Wonga a genuine company with integrity and a long term solid business model, or could they be a start up company who makes a big noise at launch, before making an even bigger noise at implode, as per some of the holiday companies that have gone ‘pop’ in recent months (XL holidays for example!)
What are their credentials to reassure us all? Firstly a credit licence with the OFT (office of fair trading) – good start! Then a responsible lending code of practise – very official! Plus a company registration number and a genuine verified published office address – very reassuring!
Next I was intrigued by the following statistics and customer satisfaction claims which are promoted extensively and prominently across the Wonga website.
92% of our customers are satisfied or very satisfied with the service they receive
95% of our customers think Wonga is easy or very easy to use
79% of our customers recommend us to their friends
72% of our customers say they frequently or always prefer to use Wonga over traditional sources of credit
The source is quoted as “online customer survey September 2009”. Now my initial reaction was how can these claims by substantiated? How many people took part in the online survey in September 2009? Reporting numbers as percentages can be relative to a low response rate. Why nothing more recent? I will endeavour to investigate these claims throughout my investigation
But the question or most objected to fact relates to extortionate rates of APR advertised by Wonga. So firstly let’s me define what an APR is.
The terms annual percentage of rate (APR), nominal APR, and effective APR (EAR) describe the interest rate for a whole year (annualised), rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate.
So as APR is an annualised measure that wasn’t designed with short term loans in mind. The APR equation takes a typical Wonga cash advance of less than a month and not only multiplies, but also compounds the interest many times over!
The larger the APR the more expensive a loan, right? Wrong. It’s a common perception, but as pay day loan companies have a flexible approach to short term credit the opposite applies. This is a good indication of the potential for APR’s to mislead when trying to judge the cost of a short term loan.
The cost of a cash advance is determined by the amount of money borrowed and the number of days you need it for – the shorter the term, the less you’ll pay in interest and fees. Yet APR actually increases as the term and cost of loan decreases. Confused? Well, as the loan period gets shorter, the more times you have to multiply and compound interest to make it into a theoretical annual figure!
- Borrow £100 for 5 days – repay £110.70. APR is calculated @ 3253%
- Borrow £100 for 10 days – repay £115.91. APR is calculated @ 3003%
- Borrow £100 for 15 days – repay £121.11. APR is calculated @ 2773%
- Borrow £100 for 20 days – repay £126.31. APR is calculated @ 2573%
Initial Wonga Scam Summary
So I now have better understanding of what an APR is and more importantly what an APR isn’t. Secondly I have definition from Wonga on what they offer and why. A much better starting point for this article to understand if the Wonga scam claims are true, by clearing up some misconceptions and general assumptions related to the potentially confusing world of financial sector for short term or pay day loans.