Credit unions are gearing up to move in on the Payday loan market dominated by high interest lenders Wonga.com and QuickQuid.
The internet lenders, characterised as “Legal Loan Sharks” by MPs and the Financial Press, could soon see their customers defecting to the new breed of mutuals, who promise fairer interest rates on the popular short-term loans that bring payday forward for an estimated million Britons a month.
Whereas Wonga.com (the one with the puppet old people in their television advertisements) and “Ten Minute Money” lender QuickQuid charge APRs of 4214% and 1734% respectively, the London Mutual Credit Union is offering fast loans at a much lower 26.8% – lower than some high street credit cards. Put it this way: a £400 loan over a month will cost you £8 in interest and charges, against the £125.48 Wonga would charge you for the same loan. You see, those APRs Wonga are at pains to tell the public are inappropriate and meaningless do mean something after all (for clarity, Wonga point out regularly through their OpenWonga website and Twitter posts that their average loan period is 16 days and that no-one therefore pays their “astronomical” APR).
So, you may ask – where’s the catch? Well, in the case of the London Mutual Credit Union, you need to live within their catchment area as they are unable to offer a nationwide service. You need to be a member of their credit union too, but that’s no bad thing – getting customers into the saving habit from as little as £2 per month.
What’s certain is that other credit unions are already watching this example and gearing up to offer their own services. Should MP Stella Creasy and her supporters get their way, the government will introduce a cap on the high interest charges that can be levied on these loans, which have become more popular as Britons face the squeeze of living costs rising faster than wages.
Dispelling the myths
Wonga is by far the most widely known Payday lender thanks to its Premier League sponsorship of Newcastle United, sponsorship of ITV’s ‘Red or Black’, those pensioner puppets and those bloody annoying radio jingles. In fairness to them, they are quick to defend themselves too, although as seen when they put a spokesman on BBCs Watchdog Programme, their wish to be “transparent” can often backfire. They have employed a journalist, Luke Manning, to run a website, OpenWonga.com which aims to present the facts about the company;
….the whole point of OpenWonga really. It’s a bold move for any private company to make; a chance for Wonga to be as transparent as possible and let people make informed decisions based on facts rather than assumptions.
The team behind OpenWonga are active on Twitter – actively countering the many, many negative posts about the company, and usually referring tweeters back to the OpenWonga site, where, as you can imagine, there isn’t a single bad word said about the company, with videos of a raft of apparently ‘unpaid’ customers happy to endorse the high cost loans.
That APR IS important.
OpenWonga tweet on “The facts of APR” and “Lots of misconceptions about Wonga’s APR” and claim most customers pay 16% because 16 days is the average Wonga loan. Of course it is true the upfront cost of such a loan IS lower than the APR – and, it would seem Wonga are keen to limit the numbers of customers ‘rolling over’ the same loan from month to month, even proudly publishing figures on this – according to their figures, 91.5% of their loans are never extended.
Of course, this doesn’t cover customers who pay their loans as intended on Payday, then when stretched during the month apply for another “new” loan. Wonga don’t give figures for this, but given they employ a customer retentions manager, it doesn’t take a genius to work out what they’re doing here. In fact, industry-wide, it is estimated that over 25% of Payday loans are used to repay… other payday loans – not necessarily with the same lender.
In terms of the “facts of APR” you only need to glance at the credit union offer to discover that actually, even over a month of the reputed “16 day” average – that APR is very important indeed. In the example given by London Mutual Credit union, based against a lower APR than Wonga’s famed 4214%, the saving in 1 month is £101 on a £400 loan. As over 66% of Payday loan applicants earn under £25,000 per annum – and even for the rest of them, if we’re being honest, £101 is an awful lot of money. Potentially £101 every month you have a Payday loan. Those are the real, incontrovertible, facts of APR!
Does my credit union offer Payday loans?
London Mutual has come up with a product that directly competes with the Payday lenders and this is widely watched by others around the country. Credit Unions often operate from upstairs offices and community centres, so you might not know where yours is. A quick Google search of “Credit Union” and your town and city should be all that’s needed. If you need a loan, and can afford the repayments, joining your local credit union will always be a cheaper option than the Payday lenders. We don’t need to qualify that remark with any terms and conditions – it’s simply a statement of fact.
Better still, just type your postcode into http://www.findyourcreditunion.co.uk/home to find your local credit union.
Payday loan controversy
No MP has been more vocal in her criticism of payday loan companies, and in particular Wonga (with their fancy advertising throughout Ant ‘n’ Dec show Red or Black) than Walthamstow MP Stella Creasy, who has amassed a veritable dossier of complaints against the company. She was present at a recent rally organised by ‘Sharkstoppers’ – an organisation founded to campaign against Wonga and its peers. The Citizens Advice Bureau offer free debt advice to the public. Their chief executive, Gillian Guy, says:
“As the payday loan industry grows, we have seen a four-fold increase in the number of people with payday loans coming to us for debt advice in the first quarter of this year, compared with the same period two years ago.
We are concerned that some of the people we are seeing seem to be using payday loans to deal with existing financial difficulties. 40% of people we see with payday loan debt have another high-cost credit loan and on average, CAB clients with payday loan debts had eight debts, while those without payday loans had five. Our evidence therefore suggests a pattern of people in long-term financial difficulty with other debts, who are much more likely to take out a payday loan to try and deal with these problems.
And yet, the payday industry remains inadequately regulated. We have seen financially vulnerable consumers unprotected from a variety of unfair practices carried out by payday lenders. Some have been able to take out unaffordable and unsuitable loans, see their debts balloon, and are offered multiple rollovers. When they are unable to pay, many are then subject to aggressive collection practices.
Many people are lost in a system that offers little protection and inadequate access to affordable credit. The Government must now deliver a much more powerful consumer credit regulation framework to protect financially vulnerable people from credit dependency and unmanageable debt.”
Stella Creasy is campaigning for a cap on the total cost of credit. The Sharkstoppers organisation, part of ‘Movement for change’ are active in supporting a government clamp-down on the high-cost lenders, believing that the products are so profitable for the lenders (or at least should be, if there is not irresponsible lending) that they should be available at more reasonable rates.
Stella was instrumental in starting an internet campaign against Wonga’s sponsorship of ITV’s ‘Red or Black’, writing an open letter to presenters ‘Ant and Dec’ imploring them to disassociate themselves from the high cost lender, a letter re-tweeted by thousands to no avail, but prompting an official response from ITV.
The sponsorship deal was doubly controversial because Wonga’s scarily high APR was omitted from the advertising, despite being a legal requirement for loan advertising. Wonga claimed this was because they were not advertising loans, and that it was merely a brand-building exercise for their Digital Finance business, despite the fact that at the time of writing, loans are the only product Wonga.com offer to the public at large.
For the sake of the Citizen’s Advice Bureau, and the thousands of loan customers struggling to meet repayments, let’s hope something can be done.